Edited version of your written advice

Authorisation Number: 1012826110678

Date of advice: 25 June 2015

Ruling

Subject: Lump sum payment from a foreign pension fund

Question

Is any part of the lump sum payment received by the taxpayer from an overseas pension plan (the Pension Plan) assessable as applicable fund earnings in accordance with 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

The Taxpayer became a resident of Australia for tax purposes (the Residency Date) some years ago.

While living overseas, the Taxpayer became a member of the Pension Plan.

The Pension Plan was unable to provide the exact amount that was vested in the Taxpayer at the day before the Residency Date.

The Taxpayer has agreed to a value with regard to their benefits in the Pension Plan as at the date before the Residency date.

The Taxpayer cannot access their benefits in the Pension Plan other than at retirement.

There have been no contributions or pension amalgamations to the Pension Plan since the Taxpayer became an Australian resident for tax purposes.

The Taxpayer directly transferred all their benefits from the Pension Plan to a complying superannuation fund in Australia (the Australian Fund) during the 2014-15 income year as a lump sum.

The ATO daily exchange rate was applied at this date, and it is published on the ATO website.

The Taxpayer no longer has any interests in the Pension Plan.

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 subsection 305-80)

Income Tax Assessment Act 1997 section 960-50

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

Reasons for decision

Summary

A portion of the lump sum payment transferred from the Pension Plan will be included as assessable ‘applicable fund earnings’ in the Taxpayer’s tax return for the 2014-15 income year.

As the Taxpayer no longer has an interest in the UK Fund, the Taxpayer is eligible, provided the other requirements in section 305-80 of the Income Tax Assessment Act 1997 (ITAA 1997) are met, to make an election to have all or part of the applicable fund earnings treated as assessable income of the Australian superannuation fund.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Section 305-70 of the ITAA 1997 applies to lump sum payments from foreign superannuation funds that are received more than six months after a person has become an Australian resident.

In accordance with subsection 305-70(2) of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 of the ITAA 1997, is included in the assessable income of a person.

The applicable fund earnings amount is subject to tax at the person’s marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings amount is worked out under subsection 305-75(3) of the ITAA 1997 where the person was not an Australian resident at all times during the person to which the lump sum relates.

Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it must first be ascertained 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:

(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:

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 the 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.

Therefore, 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 Pension Plan.

Meaning of ‘provident, benefit, superannuation or retirement fund’

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 (Cth) (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 section 62 of the SISA, a regulated superannuation fund must be ‘maintained solely’ for the ‘purposes’ of providing benefits to a member when the events occur:

n on or after retirement from gainful employment; or

n attaining a prescribed age; or

n on or after cessation of work on account of ill-health; and

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

Notwithstanding that 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, it is clear that the Pension Plan was established outside of Australia and that its central management and control are outside of Australia. In addition, the Taxpayer’s benefits in the Pension Plan are only payable upon retirement. As such, the Pension Plan would meet the definition of a superannuation fund.

Therefore, on the basis of the information provided, the Commissioner considers the Pension Plan to be a foreign superannuation fund for the purposes of section 305-70 of the ITAA 1997.

Applicable fund earnings

The Taxpayer became a resident of Australia for tax purposes some years ago and their benefits were transferred from the Pension Plan on date in the 2014-15 income year. As this is more than six months after the Taxpayer became an Australian resident, section 305-70 of the ITAA 1997 applies to include the ‘applicable fund earnings’ (if any) in the Taxpayer’s assessable income.

The ‘applicable fund earnings’ amount is worked out under subsection 305-75 of the ITAA 1997. 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) of the ITAA 1997 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).

This means that the Taxpayer is assessed only on the income the Taxpayer earned on the benefits in the Pension Plan less any contributions the Taxpayer made since becoming a resident of Australia. Any earnings made during the period of non-residency and transfers 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 provides that an amount in a foreign currency is to be translated into Australian currency.

The Commissioner’s view on the application of this subsection in relation to section 305-75 of the ITAA 1997 is expressed in ATOID 2015/7 which states the ‘applicable fund earnings’ amount should be calculated by deducting the Australian dollar equivalent of the amount vested in the foreign fund just before the day the taxpayer first became an Australian resident, from the amount received from the foreign fund. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum.

Amounts to be used in calculation

The Taxpayer’s total vested amount in the Pension Plan on the day before the Taxpayer became an Australian resident is converted into Australian dollars at the exchange rate that applied on the date that the payment was received.

From the facts provided no contributions or transfers were made to the Pension Plan since the Taxpayer became a resident of Australia.

The amount received 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) of the ITAA 1997 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 the Taxpayer’s case, that period would have been from the date the Taxpayer became an Australian resident to the date the Taxpayer received the payment. The Taxpayer was a resident for the whole of that period.

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

Calculation of the assessable amount of the payment from the Pension Plan

In accordance with subsection 305-75(3) of the ITAA 1997 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) of the ITAA 1997.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997.

To this figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997.

The result of the above calculation is a positive amount which represents the applicable fund earnings. Accordingly, that portion of the lump sum payment transferred from the Pension Plan will be included as assessable ‘applicable fund earnings’ in the Taxpayer’s tax return for the 2014-15 income year.

However, as in the Taxpayer’s case, a person who transfers their overseas superannuation as a lump sum directly to a complying Australian superannuation fund more than six months after becoming a resident, and satisfies the requirements in section 305-80 of the ITAA 1997, may 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.