Edited version of your written advice

Authorisation Number: 1012990839484

Date of advice: 30 March 2016

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the lump sum benefits transferred from an overseas pension scheme to an Australian superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A person (Your Client) became a resident Australia for tax purposes on a date several years ago (the Residency Date).

Your Client held an interest in an overseas pension scheme (the Foreign Scheme).

Benefits in the Foreign Scheme are only payable upon:

• reaching normal pension age; or

• before normal pension age by reason of ill-health; or

• death (to a chosen nominee).

Your Client is unable to obtain from the Foreign Scheme the amount in the Foreign Scheme that was vested in them on the day before the Residency Date.

Your Client has agreed to an estimate of the amount in the Foreign Scheme that was vested in them on the day before the Residency Date is an amount.

During the 20XX-YY income year, Your Client received a lump sum payment from the Foreign Scheme.

The payment from the Foreign Scheme was transferred directly to a complying Australian superannuation fund (the Australian Fund).

The transferred lump sum represented all of Your Client's interest in the Foreign Scheme.

Your Client has not made any contributions, nor have there been any transfers to the Foreign Scheme since Your Client migrated to Australia.

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 305-70

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 part of the lump sum payment received by Your Client from the Foreign Scheme should be included in Your Client's assessable income for the 20XX-YY income year as applicable fund earnings amount in respect of the lump sum.

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 is assessable under section 305-70 of the ITAA 1997.

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.

Applicable fund earnings is 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.

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.

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 meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), which states that a 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. 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 accordance with section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for one or more of the 'core purposes'; or one or more of the 'core purposes' and one or more of the 'ancillary purpose', namely for the provision of benefits to a member on or after:

• retirement from gainful employment; or

• attaining a prescribed age; or

• the member's death (this may require the benefits being passed on to a member's dependents or legal representative); or

• the termination of member's employment with an employer who had, at any time, contributed to the fund in relation to the member; or

• the member's cessation of work for gain or reward on account of ill-health.

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) 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.

Therefore, in order for an overseas fund to be considered a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must be a provident, benefit, superannuation or retirement fund as discussed above.

In this case, it is clear that the Foreign Scheme is established outside of Australia and its central management and control is outside of Australia. In addition, benefits provided by the Foreign Scheme are paid only upon retirement and death. Therefore, on the basis of the information provided, the Commissioner considers that the Foreign Scheme is a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

Applicable fund earnings

Your Client became a resident of Australia for tax purposes several years ago and received the lump sum payment in respect of their entitlements in the Foreign Scheme during the 20XX-YY income year. As this was more than six months after Your Client became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in respect of the payment in their assessable income for the 20XX-YY income year.

The 'applicable fund earnings' amount is worked out under section 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 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 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).

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1

The effect of section 305-75 of the ITAA 1997 is that Your Client is assessed only on the income they earned on the benefits in the Foreign Scheme less any contributions they made since they became a resident of Australia. Any earnings made during periods of non-residency, and transfers into the Foreign Scheme do not form part of the taxable amount when the 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 of the ITAA 1997 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.

The Commissioner's view on the application of this subsection in relation to section 305-75 of the ITAA 1997 is expressed in the ATO Interpretative Decision ATO ID 2015/7 Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997 which 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.

Calculation of the assessable amount of the payment from the Foreign Scheme

In accordance with subsection 305-75(3) of the ITAA 1997, the amounts determined at subparagraphs 305-75(3)(a)(i), (ii) and (iii) of the ITAA 1997 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 amount determined under paragraph 305-75(3)(d) of the ITAA 1997.

The result is the amount that should be included in Your Client's income tax return for the 20XX-YY income year as the 'applicable fund earnings' amount of the lump sum received from the Foreign Scheme.

Election

A taxpayer who is transferring their overseas superannuation 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 all or part of the applicable fund earnings 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 tax 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.

Therefore, as Your Client no longer has an interest in the Foreign Scheme, they may make an election to have all or part of the applicable fund earnings treated as assessable income of their Australian superannuation fund.