Edited version of your written advice

Authorisation Number: 1012850766299

Date of advice: 1 August 2015

Ruling

Subject: Applicable fund earnings

Question

Will applicable fund earnings as worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a lump sum transfer from the foreign pension?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

The Taxpayer arrived in Australia in a number of years ago and continues to remain an Australian resident for tax purposes.

While living and working overseas, the Taxpayer accumulated a foreign pension (the Pension).

The Pension allows for early withdrawal when:

• retirement benefits are to finance owner occupied property

• leaving that foreign country permanently but a departure tax is applied

• becoming self-employed and therefore not joining a pension fund

• the vested benefits account has a lower balance than the current annual contribution

• the account holder dies in that case the beneficiaries receive the retirement benefits

The Taxpayer intends to transfer a lump sum benefit from the Pension to Australia.

The Taxpayer's authorised tax agent confirmed that

• the Taxpayer has not transferred the lump sum from the Pension to Australia;

• it has not been decided whether the lump sum amount will be transferred to the Taxpayer or a superannuation fund;

• the taxpayer has been an Australian resident for the whole time since dd/mm/yyyy; and

• the Taxpayer has not made any contributions to their foreign pension since they became an Australian resident.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Section 305-55

Income Tax Assessment Act 1997 Section 305-60

Income Tax Assessment Act 1997 Section 305-65

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

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

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Subsection 10(1)

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Summary

The lump sum payment from the Pension is not considered to be a payment from a 'foreign superannuation fund', therefore subdivision 305-75 of the ITAA 1997 does not apply

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds.

Section 305-55 of the ITAA 1997 restricts the application of that subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax-free. It is not assessable income and is not exempt income (sections 305-60 and 305-65 of the ITAA 1997).

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 applies to include any applicable fund earnings in assessable income.

Before determining whether an amount is exempt under sections 305-60, or 305-65 of the ITAA 1997, or assessable under section 305-70, 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 subdivision 305-B will not apply.

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 (SISA).

Subsection 10(1) of the SISA provides that:

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.

Furthermore, Justice Kitto's judgment 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.

It has been indicated that the benefits in the Pension can be accessed before retirement age, provided certain withdrawal conditions are met. For example, it is possible to withdraw the benefits early to finance owner occupied property.

As the benefits in the Pension can be accessed for such pre-retirement purposes, the Pension does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

Therefore, on the basis of the information provided, the Commissioner considers that a lump sum payment from the Pension is not received from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Consequently, subsection 305-75 of the ITAA 1997 does not apply to the lump sum payment the Taxpayer received from the Pension.