Edited version of your written advice

Authorisation Number: 1012786957060

Ruling

Subject: Foreign lump sum payment

1. Is any part of the benefit transferred from a foreign pension scheme (the Foreign Pension Scheme) to a superannuation fund in Australia assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Are you entitled to choose under section 305-80 of the ITAA 1997 to include all or part of the applicable fund earnings (if any) in the assessable income of the Australian superannuation fund?

Answers

1. Yes

2. Yes

This ruling applies for the following period

Income year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

You became a resident of Australia a number of years ago.

While living overseas, you became a member of the Foreign Pension Scheme.

The Foreign Pension Scheme was established overseas and its central management and control is overseas.

You have advised that:

• you cannot access your benefits in the Foreign Pension Scheme other than at retirement;

• there have been no contributions to the Foreign Pension Scheme since you became an Australian resident for tax purposes; and

• you no longer hold any interest in the Foreign Pension Scheme.

The trustee of the Foreign Pension Scheme was not able to provide the value of your benefits in the Foreign Pension Scheme on the day just before you became a resident of Australia. Consequently, you agreed that an estimated amount would be used instead.

During the 2014-15 income year, you transferred you entire benefit from the Foreign Pension Scheme to an Australian complying superannuation fund (the Australian Fund).

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 295-95(2)

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Section 305-80

Income Tax Assessment Act 1997 Subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

All legislative references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

An 'applicable fund earnings' amount in respect of the lump sum transferred from the Foreign Pension Scheme to the Australian Fund should be included in your income tax return for the 2014-15 income year. However, you may choose to have all, or part, of this amount included in the assessable income of the Australian Fund instead.

Detailed reasoning

Section 305-70 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum (if any) in their assessable income.

For the purposes of section 305-70, 'applicable fund earnings' are worked out under section 305-75. In particular, subsection 305-75(3) is used to calculate applicable fund earnings where the taxpayer became an Australian resident after the start of the period to which the lump sum relates.

In essence, the amount of applicable fund earnings in relation to a superannuation lump sum to which section 305-70 applies is the part of the lump sum that is attributable to earnings that have accrued to the individual in the foreign superannuation fund during the period the individual is an Australian resident.

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) as a superannuation fund that is not an Australian superannuation fund.

In accordance with subsection 295-95(2), a superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and …

Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia is not an Australian superannuation fund. Consequently, such a fund would be a foreign superannuation fund as defined in subsection 995-1(1).

The meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (the SISA) which states:

superannuation fund means:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

The High Court examined both the terms 'superannuation fund' and 'fund' in Scott v. Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (1966) 10 AITR 290. In that case, Justice Windeyer stated:

…I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.

The issue of what constitutes a 'provident, benefit, superannuation or retirement fund' was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519. In that case, Justice Kitto held that a fund had to exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense…'. This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose' such as the example given by Justice Kitto of a funeral benefit.

In accordance with section 62 of the SISA (Sole purpose test), a regulated superannuation fund must be maintained solely for the provision of benefits specified in subsection 62(1) of the SISA. The 'core purposes' specified in that subsection relate to providing retirement or death benefits for, or in relation to, fund members; and the 'ancillary purposes' relate to the provision of benefits on the cessation of a member's employment, other death benefits and other approved benefits.

Notwithstanding the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and the Superannuation Industry (Supervision) Regulations 1994) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

In this case, the Foreign Pension Scheme was established outside of Australia and its central management and control are outside of Australia. In addition, your benefit in the Foreign Pension Scheme is only payable upon retirement. As such, the Foreign Pension Scheme would meet the definition of a superannuation fund.

Therefore, on the basis of the information provided, the Commissioner considers the Foreign Pension Scheme to be a foreign superannuation fund for the purposes of section 305-70.

Applicable fund earnings

You became a resident of Australia for tax purposes a number of years ago and received the lump sum payment in respect of your entitlements in the Foreign Pension Scheme during the 2014-15 income year. As this was more than six months after you became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' (if any) in your assessable income.

The 'applicable fund earnings' amount is worked out under section 305-75. As mentioned earlier, subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

Subsection 305-75(3) states:

If you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows:

(a) work out the total of the following amounts:

(i) the amount in the fund that was vested in you just before the day (the start day) you first became an Australian resident during the period;

(ii) the part of the payment that is attributable to contributions to the fund made by or in respect of you during the remainder of the period;

(iii) the part of the payment (if any) that is attributable to amounts transferred into the fund from any other *foreign superannuation fund during the period;

(b) subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for *foreign income tax);

(c) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

(d) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

Foreign currency conversion

Subsection 960-50(1) states that an amount in a foreign currency is to be translated into Australian dollars (A$). The applicable fund earnings amount is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

• first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

• then, calculate the other amounts.

In ATO Interpretative Decision ATO ID 2015/7, the Commissioner considers what is the correct rule for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' in relation to a superannuation lump sum under section 305-75 and states that each amount in a foreign currency that is an element in the calculation of 'applicable fund earnings' is to be translated to Australian dollars at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Therefore, for the purposes of section 305-70, your 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount in the Foreign Pension Scheme vested in you on the day before you became an Australian resident, from the amount received from the Foreign Pension Scheme during the 2014-15 income year. The amount should be translated to Australian dollars using the exchange rate applicable on date of receipt of the lump sum.

Amounts to be used in calculation

The amount in the Foreign Pension Scheme vested in you on the day before you became an Australian resident is converted into Australian dollars at the exchange rate that applied on the date the payment was received.

From the facts provided no contributions have been made to the Foreign Pension Scheme since you migrated to Australia.

The amount received from the Foreign Pension Scheme in the 2014-15 income year is converted into Australian dollars at the exchange rate that applied on the date the payment was received.

'The period' for the purposes of paragraph 305-75(3)(c) commences on the day on which the person first became an Australian resident for tax purposes and ceases on the day the lump sum is paid. In your case, that period is from the date you became an Australian resident to the date you received the payment.

There are no previously exempt fund earnings in relation to the lump sum.

Calculation of the assessable amount of the payment from the Foreign Pension Scheme

In accordance with subsection 305-75(3), the amounts determined at subparagraphs 305-75(3)(a)(i), (ii) and (iii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b).

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c).

To this figure we add the amounts determined under paragraph 305-75(3)(d).

Consequently, you should include a portion of the lump sum payment transferred from the Foreign Pension Scheme to the Australian superannuation fund as assessable 'applicable fund earnings' in your income tax return for the 2014-15 income year.

Election

A taxpayer who is transferring their overseas superannuation benefits directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) to have all or part of the applicable fund earnings treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1)).

As you no longer have an interest in the Foreign Pension Scheme, you are eligible to make an election to have all, or part, of this amount treated as assessable income of the Australian Fund.