Private ruling: Lump sum payment from a foreign super fund
Published: April 2015
Ruling period: The year ending 30 June 2013.
Date scheme commenced: 1 July 2012.

Ruling: Q1: Is any part of the benefits transferred from Pension Fund 1, a pension scheme in an overseas country, applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is any part of the benefits transferred from Pension Fund 2, a pension scheme in an overseas country, applicable fund earnings under section 305-75 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: You are the tax agent for the trustee of an estate (the Estate) The Deceased migrated to Australia and became an Australian resident prior to the 2012-13 income year. The Deceased held an interest in two pension schemes in an overseas country, Pension Fund 1 and Pension Fund 2. You advised us of the value of Pension Fund 1 as at the date of residency. There have been no contributions to Pension Fund 1 or Pension Fund 2 since the Deceased migrated to Australia. The Deceased could not access their benefits in Pension Fund 1 or Pension Fund 2 other than at retirement in the overseas country. During the 2012-13 income year the Deceased's benefits in Pension Fund 1 were paid into the Estate. During the 2012-13 income year, the Deceased's benefits in Pension Fund 2 were transferred to the Deceased's spouse in their capacity as trustee and executor of the Deceased's estate. Documentation was provided to show that the amount received in Australian dollars from Pension Fund 2. Pension Fund 1 and Pension Fund 2 were then closed. Assumptions The value of the Deceased's benefits in Pension Fund 2 on the day before residency was calculated with reference to the value of Pension Fund 2 on another date which you provided. The Commissioner considers it reasonable to assume that the value of the Deceased's benefits in Pension Fund 2 was this amount. You have agreed with the Commissioner.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 295-95(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 subsection 305-80(1) | Income Tax Assessment Act 1997 subsection 305-80(2) | 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: No portion of the lump sum payments transferred from Pension Fund 1 and Pension Fund 2 , is to be included as assessable 'applicable fund earnings' in the Estate's tax return for the 2012-13 income year. | 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 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 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. In this case, the lump sum benefits were transferred from Pension Fund 1 and Pension Fund 2. It is evident that both of these pension schemes where established in an overseas country and are not Australian superannuation funds as defined in subsection 295-95(2) of the ITAA 1997. | 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. The documentation provided indicates that the Deceased's benefits in Pension Fund 1 and Pension Fund 2 are only payable upon retirement and the funds would meet the definition of a superannuation fund. In addition, it is clear the payers of the lump sum payments were 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 received were 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 prior to the commencement of the 2012-13 income year and the lump sum payment in respect of their entitlements in Pension Fund 1 was paid into their Estate during the 2012-13 income year. The Deceased's entitlements in Pension Fund 2 were paid to their spouse in their capacity as trustee of the Estate during the 2012-13 income year. As this was more than six months after the Deceased became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in the Estate's assessable income. The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. 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 Estate is assessed only on the income earned (the accretion) in respect of Pension Fund 1 and Pension Fund 2 less any contributions the Deceased made since they became a resident of Australia. 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. For the purposes of section 305-70 of the ITAA, the 'applicable fund earnings' should be calculated by: • translating the lump sum payment received from the overseas superannuation 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 - Amounts to be used in calculation: You have provided the value of Pension Fund 1 on the date of residency. Given the unlikelihood of this amounts changing significantly in one day, this amount will be used on date before the Deceased became a resident of Australia. You have also agreed to the value of the Deceased's benefits Pension Fund 2 as at the date before they became a resident of Australia. These values are converted into Australian dollars at the exchange rate that applied on that day. From the facts provided no contributions have been made to Pension Fund 1 or Pension Fund 2 since the Deceased migrated to Australia. The Deceased's benefits in Pension Fund 1 were paid out directly into the Estate and the benefits in Pension Fund 2 were paid to the Deceased's spouse, in their capacity as trustee of the Estate. Therefore these amounts were vested in the Estate when the lump sums were paid. These amounts are converted into Australian dollars at the exchange rate that applied on that day they were transferred. In relation to Pension Fund 2, you provided documentation to show what amount was received by the Trustee in Australian Dollars. Therefore no conversion is required. '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 for tax purposes and ceases on the day the lump sum is paid. The Deceased and their Estate was a resident of Australia for the whole of all these 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 There are no previously exempt fund earnings in relation to the lump sums. | Detailed Reasoning - Pension Fund 1: 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: Subparagraph 305-75(3)(a)(i) $A Subparagraph 305-75(3)(a)(ii) Nil Paragraph 305-75(3)(a)(iii) Nil Paragraph 305-75(3)(b) $B Paragraph 305-75(3)(c) 1 Paragraph 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from Pension Fund 1: In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at subparagraphs 305-75(3)(a)(i), (ii) and (iii) are added: $A + nil + nil = $A This total is then subtracted from the amount determined under paragraph 305-75(3)(b): $B less $A is -$C This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c): -$C x 1 = -$C To this figure we add the amounts determined under paragraph 305-75(3)(d): -$C + nil = -$C As the amount calculated under paragraph 305-75(3)(b) is less than zero, no amount of the lump sum from Pension Fund 1 is to be included in the Estate's tax return for the 2012-13 income year as applicable fund earnings. | Detailed Reasoning - Pension Fund 2: 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 2 are as follows: Subparagraph 305-75(3)(a)(i) $X Subparagraph 305-75(3)(a)(ii) Nil Paragraph 305-75(3)(a)(iii) Nil Paragraph 305-75(3)(b) $Y Paragraph 305-75(3)(c) 1 Paragraph 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from Pension Fund 2: In accordance with subsection 305-75 (3) of the ITAA 1997 the amounts determined at subparagraphs 305-75(3)(a)(i), (ii) and (iii) are added: $X + nil + nil = $X This total is then subtracted from the amount determined under paragraph 305-75(3)(b): $Y less $X is -$Z This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c): -$Z x 1 = -$Z To this figure we add the amounts determined under paragraph 305-75(3)(d): -$Z + nil = -$Z As the amount calculated under paragraph 305-75(3)(b) is less than zero, no amount of the lump sum from Pension Fund 2 is to be included in the Estate's tax return for the 2012-13 income year as applicable fund earnings.