Edited version of your written advice

Authorisation Number: 1012815890363

Ruling

Subject: Lump sum payment from foreign pension fund

Question

Will any part of the lump sum benefit transferred from your client's foreign pension fund to a superannuation fund in Australia be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

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

Your Client migrated to Australia during the 200X income year.

Prior to becoming an Australian resident for tax purposes, Your Client held an interest in a foreign pension fund (the Scheme).

You were unable to provide the total value of Your Client's interest in the Scheme as at the day before they became an Australian resident.

You have agreed to the method used to determine the value of Your Client's benefits as at the day before they became an Australian resident, which was calculated to be X.

Your Client could not access benefits in the Scheme other than at retirement.

During the 2014-15 income year, Your Client's total benefits of Y were transferred from the Scheme to an Australian complying superannuation fund.

The daily exchange rate for the relevant payment date was that published on the ATO website.

No contributions have been made to the Scheme since Your Client became a resident of Australia.

No amounts have been transferred into the Scheme from any other foreign superannuation fund since your client became a resident of Australia.

Your Client no longer holds an interest in the Scheme.

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 305-80.

Income Tax Assessment Act 1997 section 960-50.

Income Tax Assessment Act 1997 subsection 995-1(1).

Reasons for decision

Summary

A portion of the lump sum payment to be transferred from the Scheme will be included as assessable 'applicable fund earnings' in Your Client's tax return for the 2014-15 income year.

Your Client may be eligible to make an election to have all or part of the applicable fund earnings treated as assessable income of their complying Australian superannuation fund.

Detailed Reasoning

Lump sum payments transferred from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received more than six months after a person has become an Australian resident are assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The remainder of the lump sum payment is not assessable income and is not exempt income.

The 'applicable fund earnings' is the amount worked out under either subsections 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund then section 305-70 will not have any application.

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:

(a) a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

Subsection 295-95(2) of the ITAA 1997 defines Australian superannuation fund as follows:

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

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total market value of the fund's assets attributable to superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

Thus, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a 'foreign superannuation fund'. The fact that some of its members may be Australian residents would not necessarily alter this.

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (the SISA).

Subsection 10(1) of the SISA 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 Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). 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.

Meaning of 'provident, benefit, superannuation or retirement fund'

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 Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). 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.

Furthermore, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur:

• on or after retirement from gainful employment; or

• attaining a prescribed age; and

• on the member's death. (this may require the benefits being passed on to a member's dependants or legal representative).

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 its attendant regulations) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SISA.

As the Scheme is set up for the express purpose of providing for the payment of benefits in the nature of superannuation, as shown the fact that benefits in the Scheme could not be accessed other than at retirement, it meets the definition of superannuation fund.

Further, as the Scheme's central management and control is clearly not in Australia it is evident that the Scheme is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Accordingly, on the information provided, the Commissioner considers that the Scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a person's assessable income where the payment is received more than six months after a person has become an Australian resident.

In this case, the facts show Your Client became a resident of Australia for tax purposes during the 200X income year (the residency date) and they received the lump sum superannuation payment (the lump sum) during the 2014-15 income year. Accordingly, as the lump sum is received more than six months after Your Client became an Australian resident a portion of the lump sum will be assessable under section 305-70 of the ITAA 1997.

The amount included as assessable income is calculated under subsection 305-75(3) of the ITAA 1997 because Your Client became an Australian resident after the start of the period to which the lump sum relates.

Subsection 305-75(3) of the ITAA 1997 states:

If you become an Australian resident after the start of the period to which the lump sum relates (but before you received it) 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 remainder of 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 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).

The calculation of this portion effectively means that you will be assessed only on the income earned while you were a resident of Australia. That is, you will only be assessed on the accretion in your benefits less any contributions made since you became a resident of Australia.

Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 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) of the ITAA 1997 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.

The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your Client's case:

• item 11 which deals with a receipt or payment to which none of the other items apply, and

• item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

The payment that your Client received is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the date of receipt.

When the amount in the Scheme that was vested in Your Client just before they became a resident of Australia is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances.

The Commissioner considers that, in the circumstances of this case, the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsections 305-75(2) and (3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum given that:

• in essence, the amount of applicable fund earnings in relation to a superannuation lump sum to which section 305-70 of the ITAA 1997 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;

• a comparison must be made between the amount of a superannuation lump sum to which section 305-70 of the ITAA 1997 applies and the amount of the individual's applicable fund earnings in relation to that lump sum to determine the amount included in the assessable income of the individual under subsection 305-70(2) of the ITAA 1997; and

• the amount of a superannuation lump sum to which section 305-70 of the ITAA 1997 applies is to be translated to Australian currency at the exchange rate applicable at the time of its receipt.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amounts vested in the Scheme just before the day your Client became an Australian resident, from the amounts received from the Scheme. Both amounts should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum.

Amounts to be used in calculation in relation to the lump sum payment

The amount in the Scheme that was vested in your client on the day before they became an Australian resident was calculated to be X. This is translated into Australian dollars at the exchange rate that applied on the day the superannuation lump sum payment was made which converts the amount of X to A$X.

The facts state that no contributions or amalgamations were made to the Scheme after your client became an Australian resident.

The value of your client's benefits on payment date was Y. The exchange rate used above converts this amount to A$Y.

For the purposes of paragraph 305-75(3)(c) of the ITAA 1997 'the period' commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid.

As your client was a resident for the whole of that period, the Australian resident days and the total days are the same. Therefore the proportion to be used in the following calculation is 1.

Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

305-75(3)(a)(i) $X

305-75(3)(a)(ii) Nil

305-75(3)(a)(iii) Nil

305-75(3)(b) $Y

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the lump sum payment

In accordance with subsection 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 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).

The amount worked out above, $Z, represents Your Client's assessable 'applicable fund earnings' had the transfer taken place on the relevant payment date. Further, this amount would need to be included in your Client's 2014-15 income tax return.

Your Client's may however be able to elect to have all or part of the payment treated as assessable income of the Australian superannuation fund. This is discussed below.

Election

A taxpayer transferring their overseas superannuation 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) of the ITAA 1997 to have all or part of the payment's 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 under subsection 305-80(1) of the ITAA 1997.