Edited version of your written advice

Authorisation Number: 1012829247810

Date of advice: 24 June 2015

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1

Is any part of the benefits transferred from Pension Fund 1, a pension scheme in a foreign country to an Australian superannuation fund applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is any part of the benefits transferred from Pension Fund 2, a pension scheme in a foreign country to an Australian superannuation fund applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

Yes

Question 3

Is any part of the benefits transferred from Pension Fund 3, a pension scheme in a foreign country to an Australian superannuation fund applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 4

Is any part of the benefits transferred from Pension Fund 4, a pension scheme in a foreign country to an Australian superannuation fund applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 20YY.

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your client (the Taxpayer) became an Australian resident on a certain date prior to the 20XX-20YY income year (the Residency Date).

The Taxpayer held an interest in four pension schemes established and controlled in an overseas country. These are Pension Fund 1, Pension Fund 2, Pension Fund 3 and Pension Fund 4 (collectively, the Foreign Pension Schemes).

The Taxpayer could not access their benefits in any of the Foreign Pension Schemes other than at retirement in the overseas country.

In relation to the Pension Fund 1 and Pension Fund 3 pension schemes; there have been no contributions since the Taxpayer migrated to Australia.

The Taxpayer made the following contributions after he migrated to Australia:

During the 20XX-YY income year the Taxpayer transferred their entire interest in the Foreign Pension Schemes to a complying Australian superannuation fund.

The transfers to the Australian Fund were completed on various dates during the 20XX-20YY income year.

The Taxpayer no longer has an interest in any of the foreign Pension Schemes.

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 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 each of the lump sum payments transferred from the Pension Fund 1, Pension Fund 2, Pension Fund 3 and Pension Fund 4 pension schemes (the Foreign Pension Schemes) will be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the 20XX-YY income year.

As the Taxpayer no longer has an interest in the Foreign Pension Schemes, he is eligible to make an election to have the applicable fund earnings treated as assessable income of his 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, will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997).

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

The applicable fund earnings are the amount worked out under either subsection 305-75(2) or (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 was not an Australian resident at all times during the period to which the lump sum relates.

An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund.

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.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997, 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.

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

In accordance with subsection 10(1) of the SISA, 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.

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) 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.

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 (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.

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 the Superannuation Industry (Supervision) Regulations 1994 (SISR)) 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 and the SISR.

Therefore, in order for the lump sum payment from the overseas fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also turn to subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above.

In this case, the documentation provided indicates the Taxpayer's benefits in the four Foreign Pension Schemes are only payable upon retirement and the funds would meet the definition of a superannuation fund. In addition, it is clear that the Foreign Pension Schemes which made the lump sum payment to the Taxpayer were established outside of Australia with their central management and control outside of Australia.

Therefore, on the basis of the information provided, the Commissioner considers the lump sum payments from each of the four Foreign Pension Schemes were received from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

The Taxpayer became a resident of Australia for tax purposes prior to the 20XX-YY income year and received the lump sum payments in respect of their entitlements in the four Foreign Pension Schemes on various dates during the 20XX-20YY income year. As these were 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' the Taxpayer's assessable income.

The 'applicable fund earnings' are 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) 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 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 the Taxpayer is only assessed on the income earned on his benefits in the Foreign Pension Schemes less any contributions he made since becoming a resident of Australia. Any earnings made during periods 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 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.

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' under section 305-75 and states that each amount in a foreign currency that is an element in the calculation 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, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount in the Pension Fund Vested in your client just before the day they became an Australian resident, from the amount received from the Pension 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 has provided or agreed to the values of his benefits in the four Foreign Pension Schemes as at the date before he became a resident of Australia. These values are converted into Australian dollars at the exchange rate that applied on the date of receipt of the lump sum.

From the facts provided no contributions have been made to Pension Fund 1 or Pension Fund 3 since the Taxpayer migrated to Australia.

The Taxpayer made two contributions to Pension Fund 2. The Taxpayer also made a contribution to Pension Fund 4. These amounts are converted into Australian dollars at the exchange rate which applied on the day of receipt of the relevant lump sum.

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

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).

As the result of this calculation is positive, a portion of the lump sum payment transferred from each of the Foreign Pension Schemes to the Australian Fund will be included as assessable 'applicable fund earnings' in the Taxpayer's income tax return for the 20XX-YY income year.

Election

A taxpayer who transfers their overseas superannuation lump sum 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 part of the payment 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.

As the Taxpayer no longer has an interest in any of the Foreign Pension Schemes, and the other conditions are satisfied, he will be eligible to make the election.