Edited version of your written advice

Authorisation Number: 1051201216054

Date of advice: 10 March 2017

Ruling

Subject: Lump sum payment from a foreign fund

Questions

1. Is the foreign fund (the Fund) a foreign pension fund as defined in section 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is a portion of the lump sum payment from the Fund assessable as 'applicable fund earnings' under section 305-70 of ITAA 1997?

Advice/Answers

1. Yes.

2. Yes.

This ruling applies for the following period

Income year ending 30 June 20YY

Income year ending 30 June 20ZZ

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

Your Client was employed by a company and prior to the 20SS-TT income years your client resided overseas.

Your Client joined a foreign fund (the Fund) during the 20SS-TT income year.

The Fund is an overseas pension fund and operated for the benefit of its members who are all current or former employees of eligible employees of Your Client's employer.

You advise that the Fund is an occupational pension scheme established under trust. The Fund was established to provide retirement benefits for employees.

The vast majority of members of the Fund are located outside of Australia and are not residents of Australia for income tax purposes.

The Fund retains amounts on behalf of its members until they become eligible to receive a pension. A pension may be payable to a member where:

● the member achieves pension age (commonly 60 years of age, unless stated otherwise but no earlier than 55 years of age);

● the member becomes totally or partially incapacitated and is substantially required to leave the services of Your Client's employer; or

● upon the death of the member.

Should a member cease to be a member of the Fund prior to attaining eligibility to receive a pension wither by choice or by cessation of employment, the member can elect for their Cash Equivalent Transfer Value (CETV) to be transferred to a nominated pension scheme or other retirement benefit arrangement of their choosing.

Sometime within the 20SS-TT income year to the 20UU-VV income year Your Client was a resident of Australia.

Subsequently, Your Client resided overseas.

Since Your Client's return to Australia during the 20WW-XX income year they have been an Australian tax resident.

Your Client is seeking to transfer their CETV from the Fund to Australia. The transfer will be made more than six month after Your Client has become a resident of Australia.

The Fund has advised that the CETV amount can only be transferred to another pension scheme or retirement benefit arrangement such as an Australian superannuation 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 subsection 305-75(2).

Income Tax Assessment Act 1997 subsection 305-75(3).

Income Tax Assessment Act 1997 section 960-50.

Income Tax Assessment Act 1997 subsection 995-1(1).

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Superannuation Industry (Supervision) Act 1993 section 10.

Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision

Summary

The Fund is a foreign pension fund as defined in section 995-1(1) of the ITAA 1997.

A portion of the lump sum payment from SOCPF may be assessable as 'applicable fund earnings' under section 305-70 of the ITAA 1997.

Detailed Reasoning

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 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 accordance with section 62 of the SISA, a regulated superannuation fund must be maintained solely for one or more of the 'core purposes'; or for one or more of the core purposes and for one or more of the 'ancillary purposes'.

For the purposes of section 62 of the SISA, 'core purposes' means the provision of benefits:

● on or after retirement from gainful employment; or

● on attaining a prescribed age; or

● on the member's death if the death occurred before the member's retirement or attaining the prescribed age.

In accordance with paragraph 62(1)(b) of the SISA, 'ancillary purposes' means:

● the provision of benefits on or after termination of member's employment with an employer who had at any time contributed to the fund in relation to the member; or

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

● provision of benefits on member's death if the death of the member occurred after member's retirement.

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 and the SISR.

In the present case, the Fund only allows withdrawal of benefits when members reach retirement age. The Fund is set up for the express purpose of providing for the payment of benefits in the nature of superannuation. 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 Fund from being recognised as a foreign superannuation fund.

Based on the above, the Fund 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 Fund 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 the Fund to be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

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 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.

In Your Client's case, the facts show they became a resident of Australia for tax purposes during the 20WW-XX income year and that Your Client intends to transfer a lump sum superannuation payment (the lump sum) during the 20XX-YY income year more than six months after they became an Australian resident. Therefore, a portion of the lump sum may 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, Your Client 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.

The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in Your Client's case:

● item 11 which deals with a receipt or payment to which none of the other items apply, and

● item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

The payment that Your Client will receive is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the date of receipt.

When the amount in the Fund that was vested in Your Client just before they became a resident of Australia is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances.

The Commissioner considers that, in the circumstances of this case, the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsections 305-75(2) and (3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum given that:

● in essence, the amount of applicable fund earnings in relation to a superannuation lump sum to which section 305-70 of the ITAA 1997 applies is the part of the lump sum that is attributable to earnings that have accrued to the individual in the foreign superannuation fund during the period the individual is an Australian resident;

● a comparison must be made between the amount of a superannuation lump sum to which section 305-70 of the ITAA 1997 applies and the amount of the individual's applicable fund earnings in relation to that lump sum to determine the amount included in the assessable income of the individual under subsection 305-70(2) of the ITAA 1997; and

● the amount of a superannuation lump sum to which section 305-70 of the ITAA 1997 applies is to be translated to Australian currency at the exchange rate applicable at the time of its receipt.

1. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amounts vested in the Fund just before the day Your Client became an Australian resident, from the amounts received from the Fund. Both amounts should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum.