ATO ID 2012/27: Superannuation lump sum paid from foreign superannuation fund to complying superannuation fund: revocation or variation of choice to include amount of 'applicable fund earnings' in assessable income of fund
Date of decision: 28 March 2012
Year of income: Year ending 30 June 2012
Business line: Superannuation

Issue
Can an individual's choice to include all or part of their 'applicable fund earnings' in the assessable income of a complying superannuation fund under section 305-80 of the Income Tax Assessment Act 1997 (ITAA 1997) be revoked or varied once it is made?

Decision
No. An individual's choice to include all or part of their 'applicable fund earnings' in the assessable income of a complying superannuation fund under section 305-80 of the ITAA 1997 is binding and cannot be revoked or varied once it is made.

Facts
The individual is a member of an Australian superannuation fund that is a complying superannuation fund. The individual was born overseas and contributed to a foreign superannuation fund under the rules of the overseas country. The individual immigrated to Australia and became an Australian resident for tax purposes. More than six months after becoming an Australian resident, the foreign superannuation fund paid a superannuation lump sum directly to the complying superannuation fund, and, as a result, the individual no longer had an interest in the foreign superannuation fund. The superannuation lump sum included an amount of 'applicable fund earnings' as worked out under subsection 305-75(3) of the ITAA 1997. The 'applicable fund earnings' would ordinarily have been included in the individual's assessable income in the income year in which the individual was taken to receive the superannuation lump sum and taxed at their marginal rate of tax. However, the individual made a written choice under section 305-80 of the ITAA 1997 to include all of their 'applicable fund earnings' in the assessable income of the complying superannuation fund. The individual did not include the amount specified in the choice in their tax return for the income year in which the individual was taken to receive the superannuation lump sum. The amount was included in the assessable income of the complying superannuation fund in the income year in which the superannuation lump sum was transferred to the fund. The individual now seeks to revoke their choice and be assessed on the amount.

Reasons for decision
Summary: Division 305 of the ITAA 1997 sets out the tax treatment of superannuation benefits received by individuals from non-complying superannuation plans. Subdivision 305-B of the ITAA 1997 deals specifically with superannuation lump sums from foreign superannuation funds. Section 305-70 of the ITAA 1997 applies to superannuation lump sums received by an individual from a foreign superannuation fund more than six months after the individual either becomes an Australian resident or terminates their foreign employment. In accordance with subsection 305-70(2) of the ITAA 1997, an individual who receives a superannuation lump sum from a foreign superannuation fund must include in their assessable income, so much of the lump sum as is equal to: The assessable portion is subject to tax at the individual's marginal rate of tax. The remainder of the lump sum is not assessable income and is not exempt income. Where a person becomes an Australian resident after the start of the period to which the lump sum relates (but before they received it) the amount of their 'applicable fund earnings' is worked out using the method in subsection 305-75(3) of the ITAA 1997. In general terms, it is the earnings that have accrued to the individual in the foreign superannuation fund since the individual became an Australian resident. Under subsection 305-80(2) of the ITAA 1997, an individual can choose to have all or part of their 'applicable fund earnings' as worked out under section 305-75 of the ITAA 1997 included in the assessable income of the complying superannuation plan. The choice can only be made if the conditions in subsection 305-80(1) of the ITAA 1997 are satisfied. In summary, the whole of the lump sum (that the individual is taken to receive under section 307-15 of the ITAA 1997) must be paid directly from the foreign superannuation fund into the complying superannuation fund and the individual can no longer have an interest in the foreign superannuation fund immediately after it is paid. Subsection 305-80(3) of the ITAA 1997 states that the choice must be in writing and must comply with the requirements (if any) specified in the Income Tax Assessment Regulations 1997. To date, no regulations have been made for this purpose. The amount specified in a choice made under section 305-80 of the ITAA 1997 is included in the assessable income of the complying superannuation fund in the income year in which the transfer happens, in accordance with subsections 295-200(2) and 295-200(3) of the ITAA 1997. Section 305-80 of the ITAA 1997 does not expressly state whether or not a person's choice to include all or part of their 'applicable fund earnings' in the assessable income of the complying superannuation fund can be revoked or varied once it is made. There are many provisions in the income tax law that allow taxpayers to make certain 'choices', which affect their taxable income. As a general rule, once a 'choice' is made it is binding and cannot be revoked or withdrawn, unless this is specifically provided for in the relevant tax Act. This rule is a reflection of the common law principles relating to 'election', which have also been adopted in the taxation context. At common law, an election between alternative and inconsistent rights or courses of action, once knowingly and unequivocally made (either by words or action) is binding on the party who made it and cannot be revoked or changed ( Scarf v. Jardine (1882) 7 App. Cas. 345; Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corporation of India (The Kanchenjunga ) [1990] 1 Lloyd's Rep. 391; Sargent v. ASL Developments Ltd (1974) 131 CLR 634; The Commonwealth of Australia v. Verwayen (1990) 170 CLR 394 ( Verwayen )). In the High Court decision of Verwayen , Brennan J at page 421 explained the doctrine of 'election' in the following way: Election consists in a choice between rights which the person making the election knows he possesses and which are alternative and inconsistent rights: Evans v. Bartlam [1937] 2 All ER 646 at 652, 653; Tropical Traders Ltd v. Goonan (1964) 111 CLR 41 at 55; Kammins Ballrooms Co Ltd v. Zenith Investments (Torquay) Ltd [1971] AC 850 at 883...An election is binding on the party who makes it once it is made overtly - or, at all events, not later than on the communication of the election to the party or parties affected thereby: Newbon v. City Mutual Life Assurance Society Ltd (1935) 52 CLR 723 at 733; Scarf v. Jardine (1882) 7 App Cas 345 at 360-1. It is binding whether or not others who are affected by the election have acted in reliance on it... The common law principles described in Verwayen were adopted by the Administrative Appeals Tribunal in McGrory v. Federal Commissioner of Taxation [2004] AATA 609 ( McGrory ). In that case, the Tribunal was required to consider whether a taxpayer could revoke an election made under former section 139E of the Income Tax Assessment Act 1936 (ITAA 1936) to include the discount received on certain employee share options in their assessable income in the year the options were acquired. The issue arose following a decision by the Commissioner to disallow the taxpayer's objection to their income tax assessment for the relevant year on the basis that the election could not be revoked once it was made, and he had no discretion in the matter. In support of their application for a review of the decision, the taxpayer submitted that the power to make the election carried with it the implied power to revoke it. Alternatively, they argued that subsection 33(3) of the Acts Interpretation Act 1901 (AIA) provided the relevant power. The Commissioner, having regard to other election provisions in the law, maintained the view that if revocation were possible, 'one would expect to see some reference to such right in the legislation, the explanatory memorandum or the second reading speech'. Affirming the decision to disallow the objection, the Tribunal held that it would be inconsistent with the notion of an election, being a choice between alternative courses of action, to allow revocation in circumstances where the legislation did not provide for it. Furthermore, subsection 33(3) of the AIA had no application to an instrument made by a taxpayer in the exercise of a choice between alternative courses of action having different tax consequences, as it did not involve an exercise of power by the taxpayer. Senior Member Lindsay confirmed the position at general law that an election between alternative and inconsistent courses of action is binding, referring at paragraph 19 to the comments made by Brennan J in Verwayen. In the absence of express provision in the ITAA 1997 for the election to be revoked, he went on to consider whether a power of revocation could otherwise be implied, having regard to the scheme of the provisions, other election provisions in the income tax law and the contentions raised by the parties. Senior Member Lindsay concluded at paragraph 23: The election is made in the knowledge that it anticipates future events and circumstances which may or may not happen or turn out to be favourable. To allow revocation by objection at some point in the future would permit an elector to enjoy the benefit of hindsight. It would be inconsistent with the notion of an election being a choice between two alternative courses of action. I accept the submission that if such an outcome were intended, there would be express provision for it in the legislation. Consistent with the decision in McGrory and the principles at common law, it is the Commissioner's view that an individual's choice to include all or part of their 'applicable fund earnings' in the assessable income of a complying superannuation fund under section 305-80 of the ITAA 1997 cannot be revoked or varied once it is made. By making a choice under section 305-80 of the ITAA 1997, an individual is choosing between alternative and inconsistent courses of action, each carrying a different tax consequence: The ITAA 1997 does not make express provision for the choice to be revoked or varied. Nor can such a right be implied from the context of the legislative scheme, or by having regard to the Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 2) Bill 2004, which inserted the election into former section 27CAA of the ITAA 1936. Subdivision 305-B of the ITAA 1997 is intended to replicate the effect of section 27CAA of the ITAA 1936. It would be inconsistent with the concept of an election, being a choice between two alternative courses of action, to allow revocation or variation in circumstances where the ITAA 1997 does not provide for it. Accordingly, an individual is bound by a choice under section 305-80 of the ITAA 1997 and cannot revoke or vary the choice once it is made. Adopting this approach is consistent with the general rule that applies to the making of choices throughout the income tax law and promotes certainty and fairness for the complying superannuation fund whose tax obligations are directly affected by it.

Legislative references: Income Tax Assessment Act 1936 former section 27CAA former section 139E
Case references: Scarf v Jardine (1882) 7 App Cas 345 [1881-5] All ER Rep 651
Subject references: Superannuation Superannuation benefits Lump sum - superannuation benefits Superannuation benefits from foreign superannuation funds Taxpayer elections