Edited version of your written advice

Authorisation Number: 1012962803645

Date of advice: 5 February 2016

Ruling

Subject: Lump sum payments from foreign funds

Question 1

Is any part of the lump sum payments from Fund 1 included in assessable income as applicable fund earnings?

Answer

Yes.

This ruling applies for the following periods:

20XX-YY income year

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

Your client held interests in two policies at Fund 1 and two policies at Fund 2, pension funds established in a foreign country.

Your client became a resident for Australian income tax purposes on residency date.

You advised the gross value of the interests in Fund 1 on the day before the residency date.

The value on residency date for both Fund 2 policies could not be obtained.

Your client received the funds as lump sum payments in his/her bank account and you advised that the value of the interests on the day of receipt.

All interests were closed after the relevant transfers.

No contributions were made to the pension funds after the residency date.

The pension funds could not be accessed other than at retirement.

The ATO website published the daily exchange rates for the relevant dates.

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 960-50.

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

Question 1

Summary

A portion of the lump sum benefits your client received from his/her two interests in Fund 1 is assessable as 'applicable fund earnings'. The applicable fund earnings represent the increase or growth in the retirement annuity funds during the period your client was a resident of Australia for tax purposes.

In this case, the applicable fund earnings in relation to the lump sum payments is $[amount] for the 20XX-YY income year. This amount must be included as 'applicable fund earnings' in your client's tax return for the 20XX-YY income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Section 305-70 of the Income Tax Assessment Act 1997 (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 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.

The meaning of 'superannuation fund'

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).

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 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.

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.

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.

From the facts provided, benefits were only paid from Fund 1 on retirement. Therefore, the scheme would meet the definition of a superannuation fund. In addition, it is clear that the payer of the lump sum payments was established outside of Australia with its central management and control outside of Australia.

Therefore, on the basis of the information provided, the Commissioner considers that the scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 and section 305-70 of the ITAA 1997 applies to any payments from the scheme.

Applicable fund earnings

Your client received both lump sum payments more than six months after your client became an Australian resident. Therefore section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in your client's assessable income.

The 'applicable fund earnings' are worked out under section 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 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 effect of section 305-75 of the ITAA 1997 is that your client is assessed only on the income earned on his/her benefits in the scheme less any contributions he made since he became 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 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.

Amounts to be used in calculation

In relation to the lump sum payments made from the two policies from Fund 1 it is noted that:

_ your client made no contributions to the relevant interest after the residency date; and

_ no transfers were made to the relevant interest from other foreign superannuation funds.

For the purposes of paragraph 305-75(3)(c) of the ITAA 1997 'the period' commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid.

Your client was a resident for the whole of that period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the following calculations is 1.

Further, there are no previously exempt fund earnings for the purposes of paragraph 305-75(3)(d) of the ITAA 1997 in relation to each lump sum.

The benefit of each policy on the day before your client became a resident of Australia is converted into Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum.

For each policy, when a one off lump sum payment was made to your client, this is the amount vested in your client when the lump sum was paid. This amount is converted to Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum.

Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings in respect of the policy interest are as follows:

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:

$[amount] + nil + nil = $[amount]

This total is then subtracted from the amount determined under paragraph 305-75(3)(b) of the ITAA 1997:

$[amount] less $[amount] is $[amount]

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

$[amount] × 1 = $[amount]

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

$[amount] + nil =$[amount] (cents ignored)

Therefore, your client's applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 for this policy is $[amount]. This amount must be included in your client's tax return for the 20XX-YY income year. The same calculation is applied to both policies under Fund 1.