Private ruling: lump sum payments from foreign super funds
Published: February 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is any part of the benefit transferred from foreign Fund A to a superannuation fund in Australia included in your client's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is any part of the benefit transferred from foreign Fund B to a superannuation fund in Australia included in your client's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No. | Q3: Is any part of the benefit transferred from foreign Fund C to a superannuation fund in Australia included in your client's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: No.

Relevant facts and circumstances: Your client became a resident of Australia for income tax purposes over 5 years ago. Your client held an interest in the following three pension schemes in an overseas country: · Fund A · Fund B · Fund C No contributions were made to any of the foreign pension schemes during the relevant period. There were no amounts transferred into any of the foreign pension schemes from any other foreign superannuation fund during the relevant period. Funds in these foreign pension schemes cannot be accessed, other than at retirement. During the 2013-14 income year, your client's benefits in each of the pension schemes were transferred to a complying superannuation fund in Australia. The transfers represent the entire interest in each of the foreign pension schemes. You agreed on the value of Fund C on the date your client became an Australian resident.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-95(2) | Income Tax Assessment Act 1997 Section 305-55 | Income Tax Assessment Act 1997 Section 305-60 | Income Tax Assessment Act 1997 Section 305-65 | 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 Subsection 306-70 | Income Tax Assessment Act 1997 Subsection 960-50(1) | Income Tax Assessment Act 1997 Subsection 960-50(4) | 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: A portion of the lump sum payment transferred from foreign Fund A to your client's complying superannuation fund in Australia will be included as assessable 'applicable fund earnings' in your client's income tax return for the income year ended 30 June 2014. Alternatively, as your client no longer has an interest in Fund A, they can choose to have all or part of these applicable fund earnings treated as assessable income of your client's superannuation fund in Australia. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) deals with superannuation benefits paid from foreign superannuation funds. Section 305-55 of the ITAA 1997 restricts the application of the subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death. Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax free. It is not assessable income and is not exempt income [sections 305-60 and 305-65 of the ITAA 1997]. Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency or termination of foreign employment, section 305-70 applies to include any applicable fund earnings in assessable income. Before determining whether an amount is exempt under sections 305-60 or 305-65 of the ITAA 1997, or 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 subdivision 305-B of the ITAA 1997 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. 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. 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), which requires that the fund is a provident, benefit, 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 SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the following 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 your client's benefits in foreign pension schemes A, B and C are only payable upon retirement, invalidity and death, and these schemes would therefore meet the definition of superannuation fund. In addition, it is clear the payers of the lump sum payments 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 from foreign pension schemes A, B and C were from foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: Your client became a resident of Australia for tax purposes during the 2007-08 income year and received a lump sum payment from foreign superannuation fund A during the 2013-14 income year. As this was more than six months after your client became an Australian resident, section 305-70 applies to include any 'applicable fund earnings' in your client'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; (a) 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); (b) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; (c) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). In short, your client is assessed only on the income earned (the accretion) in respect of the foreign pension funds less any contributions your client made since becoming a resident of Australia. Any amounts representative of earnings during periods of non-residency, and transfers into the paying funds 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 (A$). For the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by: · converting the lump sum payment received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table to subsection 960-50(6)) and; · deducting from this amount the Australian dollar equivalent of the payment vested in the overseas superannuation fund at the exchange rate applicable on the day immediately before the residency date (item 11A of the table to subsection 960-50(6)). | Detailed Reasoning - Pension One - Fund A: The benefits in foreign Fund A, on the day before your client became a resident of Australia, is converted into Australian dollars at the exchange rate that applied on that day. From the facts provided no contributions have been made to Fund A since your client migrated to Australia. During the 2013-14 income year, your client's benefits in Fund A were paid out to your client in the form of a lump sum which was directly transferred into a complying Australian superannuation fund. This is converted into Australian dollars at the exchange rate that applied 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. Your client was a resident for the whole of both periods. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1. 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). As the result of this calculation is greater than zero, a portion of the lump sum payment from Fund A will be included as assessable 'applicable fund earnings' in your client's 2013-14 income tax return. | Detailed Reasoning - Other pensions: Using the above method for payments from Fund B and Fund C resulted in a negative result, that is, an amount less than zero. As the calculation in respect of both Funds is less than zero, no amount of the lump sum payment from Fund B and Fund C is assessable as 'applicable fund earnings' in the 2013-14 income year. | Detailed Reasoning - Conclusion:: Therefore, a portion of the lump sum payment made from Fund A to your client's Australian superannuation fund, is assessable as applicable fund earnings in the 2013-14 income year. As your client no longer has an interest in Fund A, your client is eligible to make an election to have these applicable fund earnings treated as assessable income of their Australian superannuation fund.