Private ruling: Lump sum payment from a foreign superannuation fund
Published: May 2012
Ruling period: 2008-09 income year.
Date scheme commenced: 1 July 2008.

Ruling: Q1: Is any part of the lump sum payment from a foreign pension scheme assessable as applicable fund earnings? | A1: Yes.

Relevant facts and circumstances: You are over 65 years of age. You joined the Scheme in the 1995-96 income year. This scheme provides benefits on retirement, death and disability. It does not allow the use of monies for other purposes. You left the Scheme in the 1998-99 income year. Your benefits were preserved. You became a resident of Australia for tax purposes on the residency date. No contributions were made to the Scheme by you or for you on or after you became a tax resident of Australia. In the 2008-09 income year a lump sum was paid by the Scheme to a complying superannuation fund. You no longer have an interest in the Scheme. The Reserve Bank of Australia's foreign exchange rate on the day before the day you became an Australian resident was A$1 = £EX. The Scheme is unable to provide you the value of your policy as at residency date. Therefore, you wish to assume a rate of return in order to determine the applicable fund earnings. You cannot provide the value of the lump sum payment received from the Scheme on the day immediately before your residency date and have agreed to use a rate of return to estimate this amount. Based on this, the value of the lump sum on the residency date is estimated.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 27H. | Income Tax Assessment Act 1936 Section 27H(3). | Income Tax Assessment Act 1936 Sections 159ZR-159ZRD | Income Tax Assessment Act 1997 Subsection 6-5(2). | Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Subsection 6-10(4). | Income Tax Assessment Act 1997 Subsection 10-5 | Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Subsection 295-200(2). | Income Tax Assessment Act 1997 Subsection 295-200(3). | Income Tax Assessment Act 1997 Section 305-70. | Income Tax Assessment Act 1997 Subsection 305-70(2). | Income Tax Assessment Act 1997 Paragraph 305-70(2)(b). | Income Tax Assessment Act 1997 Subsection 305-70(3). | Income Tax Assessment Act 1997 Subsection 305-75(2). | Income Tax Assessment Act 1997 Subsection 305-75(3). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(a). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(b). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(c). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(d). | Income Tax Assessment Act 1997 Section 305-80. | Income Tax Assessment Act 1997 Subsection 305-80(2). | Income Tax Assessment Act 1997 Section 960-50. | 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). | Income Tax Assessment Regulations 1997 Regulation 960-50.01. | International Tax Agreements Act 1953 Section 3AAA. | International Tax Agreements Act 1953 Section 5. | Superannuation Industry (Supervision) Act 1993 Section 10. Summary | A portion of the lump sum benefit you received from the Scheme is assessable as 'applicable fund earnings'. The applicable fund earnings represent the increase or growth in the Scheme during the period you are a resident of Australia. | The applicable fund earnings is calculated by translating the lump sum benefit received from the Scheme at the exchange rate applicable on the day of receipt into Australian dollars, and deducting from this amount the Australian dollar equivalent of the lump sum benefit on the day just before the residency date at the exchange rate applicable on that day. | The applicable fund earnings are assessable in Australia. The remainder of the lump sum benefit is not assessable income and is not exempt income. | 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 transferred or 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 'applicable fund earnings' is subject to tax at the person's marginal rate of tax. | 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. | 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. | 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 funds 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; | 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 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 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 Scheme 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. Documents provided show that the Scheme pays benefits on retirement, death, and disability, and does not allow the use of monies for other purposes. Therefore, the fund does meet the definition of a superannuation fund. | It is evident that the payer of the lump sum payment is established outside of Australia. Similarly, the central management and control is outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment you received is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Assessable Amount | As noted above, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a person's assessable income where the payment is received more than six months after becoming an Australian resident. | You became a resident of Australia for tax purposes on the residency date and the lump sum payment was received by you more than six months after you became an Australian resident. Consequently, the exemption under section 305-60 of the ITAA 1997 will not apply. Therefore, a portion of the lump sum payment will be assessable under subsection 305-75(3). | This calculation effectively means that you will be assessed only on the income earned in the foreign fund while you were a resident of Australia. That is, you will only be assessed on the accretion in the foreign fund less any contributions made since you 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. | The applicable fund earnings in relation to the lump sum payments are calculated under subsection 305-75(3) of the ITAA 1997. In this instance, subsection 305-75(3) applies because you became an Australian resident after the start of the period to which the lump sums relate. 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). | 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 (AUD). 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 you need to: | (a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and | (b) then, calculate the other amounts. | Consequently, the lump sum payment you received is translated into AUD at the exchange rate applicable at the time of receipt. Similarly, the amount vested in the fund on the day before you became an Australian resident is converted to AUD at the exchange rate that applied on that day. | Election | A taxpayer 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 payment 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 rate. | You can elect to have all or part of the above 'applicable fund earnings' treated as assessable income of your complying Australian superannuation fund because immediately after the relevant payments were made, you no longer had an interest in the foreign fund (subsection 305-80(1) of the ITAA 1997). | The election must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the Income Tax Regulations (subsection 305-80(3) of the ITAA 1997). An amount that is covered by an election under section 305-80 of the ITAA 1997 will not be treated as either a concessional contribution or a non-concessional contribution to the Australian superannuation fund. Consequently, this amount will not count towards your concessional or non-concessional contributions caps for the relevant income year.


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