Edited version of your written advice

Authorisation Number: 1012905790992

Date of advice: 3 December 2015

Ruling

Subject: Lump sums from foreign superannuation funds

Question 1

Is any part of the lump sum payment received by the taxpayer from an overseas pension plan (Pension Plan 1) assessable as applicable fund earnings in accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is any part of the lump sum payment received by the taxpayer from an overseas pension plan (Pension Plan 2) assessable as applicable fund earnings in accordance with section 305-70 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

Income year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

The Taxpayer became a resident of Australia for tax purposes on a particular date, hereinafter referred to as the Residency Date.

While living overseas the Taxpayer became a member of two pension plans, Pension Plan 1 and Pension Plan 2.

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

There have been no contributions or pension amalgamations to the Pension Plans since the Taxpayer’s Residency Date.

The Taxpayer transferred their interest in both Pension Plans to a complying superannuation fund in Australia (the Australian Fund).

The Taxpayer is unable to obtain from the Pension Plans the exact amounts that were vested in them at the day before Residency Date and has agreed to use an index rate to estimate these amounts.

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

The Taxpayer would like to include a portion of the applicable fund earnings in the assessable income of the Australian Fund.

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 305-75(3)

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 payments transferred from the Pension Plans 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 holds any interests in the Pension Plans, they are eligible, provided the other requirements in section 305-80 of the ITAA 1997 are met, to make an election to have all or part of the applicable fund earnings treated as assessable income of their 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 scheme.

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.

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. 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:

● on or after retirement from gainful employment; or

● attaining a prescribed age; or

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

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

Notwithstanding that 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 Plans were established outside of Australia and that their central management and control were outside of Australia. In addition, the Taxpayer’s benefits in the Pension Plans are only payable upon retirement. Accordingly, the Pension Plans would meet the definition of a superannuation fund.

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

Applicable fund earnings

The Taxpayer became a resident of Australia for tax purposes on the Residency Date and transferred their benefits from Pension Plans 1 and 2 more than six months after the Taxpayer became an Australian resident. Accordingly, section 305-70 of the ITAA 1997 applies to include the ‘applicable fund earnings’ (if any) from the Pension Plans 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) of the ITAA 1997 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 earned on their benefits in the Pension Plans less any contributions they made since they became 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 benefits are 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 ($A).

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.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the ‘applicable fund earnings’ amount should be calculated by:

a. Translating the amount received from each of the Pension Plans at the exchange rate applicable on the day of receipt to Australian dollars (A$); and

b. deducting from this amount, the amount in each of the Pension Plans that was vested in the Taxpayer just before the day they became an Australian resident at the exchange rate applicable on the day of receipt of the lump sums.

Amounts to be used in calculation

The values of the Taxpayer’s benefits in the Pension Plans on the day before the Taxpayer became an Australian resident for tax purposes were calculated, and these values are converted into Australian dollars at the exchange rates that applied on the day of receipt of the respective lump sums.

By using the exchange rates that applied on the day the benefits were transferred from the respective Pension Plans, the value of Taxpayer’s benefits in each of the Pension Plans as at the date before the Taxpayer became a resident has been converted from the overseas currency to Australian dollars.

By using the exchange rates that applied on the day the benefits were transferred, the payments from the Pension Plans have been converted from the overseas currency to Australian dollars.

From the facts provided, no contributions or transfers have been made to the Pension Plans since the Taxpayer became a resident of Australia.

‘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.

The Taxpayer was a resident for tax purposes during the whole of these periods. Therefore, the Australian resident days and the total days are the same. As such, the proportion to be used in the calculation is 1.

There are no previously exempt fund earnings in relation to the lump sum. Therefore, the value for this calculation is A$0.00.

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

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 results of the above calculations for each of the lumps sums received from the Pension Plans are positive amounts which represent the applicable fund earnings. Accordingly, that portion of the lump sum payments transferred from each of the Pension Plans will be included as assessable ‘applicable fund earnings’ in the Taxpayer’s tax return for the 2014-15 income year.

Election

As the Taxpayer no longer has an interest in the Pension Plans and the Taxpayer’s interests in those Plans were made as lump sums directly to a complying Australian superannuation fund, the Taxpayer is eligible, provided the other requirements in section 305-80 of the ITAA 1997 are met, to make an election to have all or part of the applicable fund earnings treated as assessable income of the Taxpayer’s Australian superannuation fund.

If the election is made, the amount of the applicable fund earnings specified in the election notice is 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.