Private ruling: Lump sum payment from foreign fund
Published: December 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the benefit transferred from an overseas pension scheme to a superannuation fund in Australia within six months of your client becoming an Australian resident, not assessable income and not exempt income, under section 305-60 of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: Your client was born in Australia. Your client left Australia in early 200X and travelled for a period of time before taking up residence in a foreign country in that same year. Your client worked overseas and was a non-resident of Australia for income tax purposes for the duration of their absence from Australia. Your client held an interest in a foreign pension scheme. There have been no contributions to this foreign pension scheme since your client returned to Australia. The funds in the foreign pension scheme cannot be accessed other than at retirement. You advised your client returned to Australia in mid 20XX with the intention to reside in Australia permanently and will be a resident for income tax purposes. In late 20XX, the entire balance in your client's foreign pension scheme was transferred into an Australian complying superannuation fund capable of receiving foreign pension transfers. The transfer represents the entire interest in the foreign fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-60 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Act 1997 Subsection 295-95(2) | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: The payment is exempt from tax as your client transferred their overseas pension funds to an Australian superannuation fund within six months after they became an Australian resident. | Detailed Reasoning - Detailed Reasoning: Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the tax treatment of superannuation benefits from foreign superannuation funds. Section 305-60 of the ITAA 1997 states: A superannuation lump sum you receive from a foreign superannuation fund is not assessable income and is not exempt income if: (a) you receive it within 6 months after you become an Australian resident; and (b) it relates only to a period: (i) when you were not an Australian resident; or (ii) starting after you became an Australian resident and ending before you receive the payment; and (c) it does not exceed the amount in the fund that was vested in you when you received the payment. Applying section 305-60 to the facts of this case, the key requirements that must be satisfied by your client are that: the superannuation lump sum is paid from a foreign superannuation fund; it is received by an Australian resident; it relates to a period when your client was not an Australian resident; and it does not exceed the amount in the fund that was vested in your client when they received the payment. 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. However, part of the definition of a foreign superannuation fund also requires consideration of what constitutes a superannuation or retirement fund. | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: The High Court examined both the terms superannuation fund and fund in Scott v. Federal Commissioner of Taxation (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 Superannuation Industry (Supervision) Act 1993 (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. Information available indicates that benefits in your client's foreign pension scheme are only payable upon retirement, incapacity and death and the scheme therefore meets the definition of superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with its central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment from the foreign pension scheme was from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. The payment from the foreign superannuation fund represents your client's entire interest in the scheme and does not exceed the amount vested in your client when the payment was received. In addition, as your client was treated as a non-resident of Australia for income tax purposes for the duration of their absence from Australia, the superannuation lump sum they received relates to a period when they were not an Australian resident. Further, your client returned to Australia in mid 20XX with the intention to permanently reside here. The benefits in the foreign pension scheme were transferred to a complying superannuation fund in late 20XX. As the transfer of benefits from a foreign superannuation fund was received within six months of your client becoming an Australian resident, section 305-60 applies to exempt the payment from tax.