Edited version of your written advice

Authorisation Number: 1012851987238

Date of advice: 31 July 2015

Ruling

Subject: Lump sum payment from foreign superannuation fund

Question

Will any part of the lump sum benefit made to your Client from the overseas scheme be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answers

Yes.

This ruling applies for the following period

Income year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

Your Client resided overseas and was employed overseas.

Prior to the 2013-14 income year Your Client moved to Australia and became a resident of Australia on this date.

Your Client was a member of an overseas superannuation fund (the Scheme).

You have provided the value of the Scheme as at the date prior to Your Client becoming an Australian resident.

In the 2013-14 income year Your Client was able to apply to withdraw funds from the Scheme.

Your Client received an amount from the Scheme in the 2013-14 income year, which was received more than 6 months after they became an Australian resident.

The Scheme was introduced to help the workforce save for old age, withdrawal of accrued benefits is only allowed when scheme members reach the retirement age of 65. However, there are circumstances under which accrued benefits may be paid before members reach the age of 65, provided that specified conditions can be met. The circumstances are:

• early retirement at age 60;

• permanent departure overseas;

• total incapacity;

• a small balance account, and as at the date of the claim, at least 12 months have elapsed since the latest contribution day in respect of the member, have no accrued benefits in other accounts related to the Scheme and have declared that you do not expect to become employed or self-employed in the foreseeable future; or

• death (the accrued benefits will be regarded as part of the member's estate to be claimed by the personal representative of the estate.

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.

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 transferred from the Scheme will be included as assessable 'applicable fund earnings' in Your Client's tax return for the 2013-14 income year.

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.

In the present case, the Scheme only allows withdrawal of accrued benefits when scheme members reach retirement age. Similar to an Australian superannuation fund, there are special circumstances where a member can request for an early withdrawal of their benefits prior to retirement age. These situations however, do not exclude the Scheme from being recognised as a foreign superannuation fund.

Based on the above, the Scheme meets the definition of superannuation fund as funds are ordinarily only obtainable once the member reaches retirement age and early or special access provisions effectively mirror those of Australian legislation. In addition, it is clear the Scheme is established outside of Australia with its central management and control outside of Australia. Therefore, on this basis, together with the above, the Commissioner considers that the lump sum your client received to be from 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 on date prior to the 2013-14 income year (the residency date) and they received a lump sum superannuation payment in the 2013-14 income year. Accordingly, as the lump sum payment was 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 Your Client will be assessed only on the income earned while they were a resident of Australia. That is, they will only be assessed on the accretion in their benefits less any contributions made since they 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.

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 Scheme vested in Your Client just before the day they became an Australian resident, from the amount received from the Scheme. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum.

Calculation of the assessable amount of the payment from the foreign superannuation fund

In accordance with 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) 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 amount worked out above represents Your Client's assessable 'applicable fund earnings'. Further, this amount would need to be included in Your Client's 2013-14 income tax return.