Private ruling: Lump sum payment from foreign pension schemes
Published: August 2013
Ruling period: For the year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Is any part of the lump sum payments, from two pension funds established in an overseas country and made as a result of a terminal illness, assessable as applicable fund earnings? 2. Is any part of the lump sum payments from overseas pension funds payments to a member having a terminal illness condition? | A1: 3. Yes 4. No

Relevant facts and circumstances: The deceased was under 55 years of age. The deceased arrived in Australia over five years ago and became a permanent resident shortly after. The deceased held an interest in two pension funds, Pension Fund A and Pension Fund B in an overseas country. Funds cannot be accessed from the two Pension Funds other than at retirement or death, however, they can be accessed for terminal illness. Due to ill health, the deceased applied to the Pension Funds for payments of their superannuation benefits and received a superannuation lump sum from each fund in the 2012-13 income year. The deceased passed away in the 2012-13 income year, after receiving both payments. You advised the value of Pension Fund A and Pension Fund B on the day before the deceased became a resident of Australia. There have been no contributions to the two Pension Funds since the deceased migrated to Australia.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-95(2) | Income Tax Assessment Act 1997 Section 303-10 | Income Tax Assessment Act 1997 Subsection 303-10(1) | Income Tax Assessment Act 1997 Subsection 303-10(2) | Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Subsection 305-70(1) | Income Tax Assessment Act 1997 Section 305-75 | Income Tax Assessment Act 1997 Subsection 305-75(2) | Income Tax Assessment Act 1997 Subsection 305-75 (3) | Income Tax Assessment Act 1997 Subsection 305-75 (5) | Income Tax Assessment Act 1997 Subsection 305-75 (6) | Income Tax Assessment Act 1997 Section 305-80 | Income Tax Assessment Act 1997 Subsection 305-80(1) | Income Tax Assessment Act 1997 Subsection 305-80 (2) | Income Tax Assessment Act 1997 Subsection 305-80 (3) | Income Tax Assessment Act 1997 Subsection 960-50(1) | Income Tax Assessment Act 1997 Subsection 960-50(4) | Income Tax Assessment Act 1997 Subsection 960-50(6) | 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: The 'applicable fund earnings' in respect of the lump sum payments received by the deceased from both Pension Funds and is to be included in the deceased's assessable income in the 2012-13 income year: The superannuation lump sum payments from Pension Fund A and Pension Fund B received by the deceased prior to the deceased's death does not qualify as a 'terminal medical condition' payment because: · a terminal medical condition payment must be made from a complying superannuation fund; · foreign superannuation funds do not qualify as complying superannuation funds as they are established and operate outside Australia. Accordingly, the superannuation lump sum payments received from the foreign superannuation funds cannot be treated as non-assessable non-exempt income (that is, tax-free). | 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, will be 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 subject to tax at the person's marginal rate. 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 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. | Detailed Reasoning - 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 an 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. 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 (SIS Act), that is: (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; | Detailed Reasoning - 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. 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 section 62 of the SIS Act, 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 SIS Act applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and the SIS Regulations) 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 SIS Act. Therefore, in order for the lump sum payment from the overseas fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above. The documentation provided indicates that in respect of the deceased's funds, benefits are only paid on retirement, death and terminal medical condition and the fund would meet the definition of a superannuation fund. In addition, it is clear the payers of the lump sum payment are established outside of Australia with their central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payments the deceased received are from foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: The deceased became a resident of Australia for tax purposes over five years ago and received the lump sum payments in respect of Pension Fund A and Pension Fund B during the 2012-13 income year. As this was more than six months after the deceased became an Australian resident, in respect of each payment, section 305-70 applies to include the 'applicable fund earnings' in the deceased's assessable income. The 'applicable fund earnings' are worked out under section 305-75. 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). In short, the deceased is assessed only on the income earned (the accretion) in respect of the Pension Fund less any contributions the deceased made since the deceased became a resident of Australia. Further, any amounts representative of earnings 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. | Detailed Reasoning - 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. The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) requires that when applying section 960-50 to amounts that are elements in the calculation of another amount, one needs to: · first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and · then, calculate the other amounts. For the purposes of section 305-70 of the ITAA 1997, the applicable fund earnings should be calculated by: · translating the lump sum payment received from the relevant pension plan at the exchange rate applicable on the day of receipt to Australian dollars; and · deducting from this amount the Australian dollars equivalent of the payment vested in the relevant pension plan at the exchange rate applicable on the day just before the residency date. | Detailed Reasoning - Amounts to be used in calculation: The value of the deceased's benefits in the Pension Fund A on the day before the deceased became a resident of Australia is converted into Australian dollars at the exchange rate that applied on that day. Because that day was a Saturday, the exchange rate to be used is that on the following business day. Similarly the value of the deceased's benefit in Pension Fund B on the day before the deceased became a resident of Australia is converted into Australian dollars. From the facts provided no contributions have been made to the Pension Funds since the deceased migrated to Australia. There have not been any transfers into the Pension Funds from other foreign pension schemes by the deceased since becoming a resident of Australia. During the 2012-13 income year, the deceased's benefits in the Pension Fund A were paid out to the deceased in the form of a one-off lump sum. Therefore this is the amount vested in the deceased when the lump sum was paid. You advised that the lump sum was converted into Australian dollars by the deceased's bank, and the amount credited on that day. Similarly the deceased's benefits in Pension Fund B were paid out to the deceased in the form of a one-off lump sum. Therefore this is the amount vested in the deceased when the lump sum was paid. You advised that the lump sum was converted into Australian dollars by the deceased's bank, and the amount credited on that day . '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 and ceases on the day the lump sum is paid. The deceased 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 calculation is 1. There are no previously exempt fund earnings in relation to the lump sum. | Detailed Reasoning - Pension Fund A and Pension Fund B: 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 for Pension Fund 1 are as follows: 305-75(3)(a)(i) the amount , converted to Australian dollars, vested in the deceased before they became a resident of Australia 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) the amount of the lump sum payment received, converted to Australian dollars 305-75(3)(c) 1 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from Pension Fund: In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at sub-paragraphs 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). This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c). To this figure we add the amounts determined under paragraph 305-75(3)(d). An amount of the lump sum payment from the Pension Fund A will be included as assessable 'applicable fund earnings' in the deceased's tax return for the 2012-13 income year. | Detailed Reasoning - Conclusion:: Part of the lump sum payment from both Pension Funds which were paid directly to the deceased, is assessable as applicable fund earnings. | Detailed Reasoning - Terminal medical condition: A person with a terminal medical condition is able to access superannuation benefits from their superannuation fund tax-free, provided that the conditions set out in section 303-10 of the ITAA 1997 are satisfied. Section 303-10 of the ITAA 1997 states: (1) This section applies to a superannuation member benefit that: (a) is a superannuation lump sum; and (b) is: (i) paid from a complying superannuation plan; or (ii) a superannuation guarantee payment, a small superannuation account payment, an unclaimed money payment, a superannuation co-contribution benefit payment or a superannuation annuity payment. (2) The lump sum is not assessable income and is not exempt income if a terminal medical condition exists in relation to you when you receive the lump sum or within 90 days after you receive it. 'Regulation 303-10.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) also requires certification by two registered medical practitioners, in respect of the terminal nature of the condition. As stated in the facts, the deceased received the lump sum payments from two foreign superannuation funds in the 2012-13 income year. The deceased passed away in the 2012-13 income year after receiving both payments. In this case, the deceased's superannuation lump sums cannot be treated as terminal medical condition payments made under section 303-10 of the ITAA 1997 because: · a terminal medical condition payment must be made from a complying superannuation fund; · foreign superannuation funds do not qualify as complying superannuation funds as they are established and operate outside Australia. Accordingly, the superannuation lump sum payments received from the foreign superannuation funds cannot be treated as non-assessable non-exempt income (that is, tax-free).