Private ruling: Transfer of benefits from an overseas pension scheme
Published: October 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is any part of the benefit transferred from an overseas pension scheme to an Australian superannuation fund assessable as applicable fund earnings? | A1: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You were employed overseas and a member of an overseas pension scheme (the Scheme) which is a foreign pension fund. During your membership of the Scheme there have been changes in its Administrators. In the 1994-95 income year you became an Australian resident for tax purposes Since you became an Australian resident no contributions were made by you or anyone on your behalf to the Scheme. In the 1999-2000 income year, an Administrator advised you in a letter (the letter) that you had the options of : · leaving your benefits in the Scheme and a the pension would be payable from your normal retirement date and the that the pension would be calculated in accordance with various rates; or · transferring your benefits to various types of pension plans. You state you did not transfer your benefits but remained with the Scheme which, from the documentation provided, shows it was for the provision of retirement benefits for yourself or in the event of your death provide benefits for your spouse. During the 2010-11 income year a policy was purchased for you within the Scheme by the Administrator. The purchase utilised all of your benefits in the Scheme and guaranteed you a set value if you decided to transfer your benefits before a set date. You subsequently entered into arrangements for the transfer of your benefits in the Scheme to your complying Australian superannuation fund (the Fund). In the 2010-11 income year the Scheme transferred your benefits to the Fund. The transfer to the Fund resulted in your no longer having any benefits in the Scheme. The Scheme's administrators are unable to provide you a transfer value as at the date you became an Australian resident. You have agreed to your benefits in the Scheme, between the day you became a resident of Australia and the date the lump sum payment was received, to as having increased by a rate mentioned in the letter from an Administrator. You have agreed to an amount, which was calculated using the above rate of return, as being the transfer value of your superannuation entitlement on the day before you became an Australian resident. You intend to have the Fund pay tax on your behalf on any applicable fund earnings. You are over 50 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Section 305-60. | Income Tax Assessment Act 1997 Section 305-70. | 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 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 Paragraph 305-80(1)). | Income Tax Assessment Act 1997 Paragraph 305-80(2)). | Income Tax Assessment Act 1997 Paragraph 305-80(3)). | Income Tax Assessment Act 1997 Subsection 960-50(1). | Income Tax Assessment Act 1997 Subsection 960-50(6). | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Summary: A portion of the lump sum benefit you received from an overseas pension scheme (the Scheme) is assessable as 'applicable fund earnings', that is, 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 dollars equivalent of the lump sum benefit on the day just before the residency date at the exchange rate applicable on that day. In this case, there are applicable fund earnings in relation to the lump sum benefit. The applicable fund earnings are assessable in Australia. The remainder of the lump sum benefit is not assessable income and is not exempt income. You can elect to have some or all of the applicable fund earnings taxed in your complying Australian superannuation fund, rather than having it included in your assessable income. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: From 1 July 2007 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 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; | 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 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 overseas pension scheme (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. It is evident that the payer of the lump sum payment, the Scheme, is established outside of Australia. Similarly, the central management and control is outside of Australia. Further, the documentation provided shows the payment of benefits is tied to a member attaining retirement age. 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. | Detailed Reasoning - Applicable fund earnings: You became a resident of Australia for tax purposes in the 1994-95 income year and you received the lump sum payment from the Scheme in the 2010-11 income year when it went into your Australian complying superannuation fund (the Fund). As this was more than 6 months after you became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your 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, you are assessed only on the income earned (the accretion) in respect of the Scheme less any contributions you 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. | 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) states 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 | Detailed Reasoning - Amounts to be used in calculation: You have agreed to an amount which was calculated as the value of your benefit on the day before you became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day. That rate was applied and the value of the overseas benefit was converted into Australian dollars. You stated that no contributions were made to the Scheme by yourself or anyone on your behalf after you became an Australian resident. No amounts were transferred into the fund from other foreign superannuation funds during the period. In the 2010-11 income year your benefits in the Scheme were paid out to you in the form of a once-off lump sum which was directly deposited by the Scheme into your Fund. Therefore this is the amount vested in you when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day. The documentation provided the shows the value of the benefit when and its converted value in Australian dollars. '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. In your case, that period is from a date in the 1999-2000 income year to a date in 2010-11 income year which shows you were 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. Applying subsection 305-75(3) to your circumstances, the amounts referred to above are used in calculating the applicable fund earnings. | Detailed Reasoning - Calculation of the assessable amount of the payment from foreign superannuation fund: In your case, the calculation made under subsection 305-70(3) of the ITAA 1997 shows there was growth in the Scheme while you were a resident of Australia. Accordingly, part of the lump sum payment received by you from the Scheme is to be included as assessable income in the 2010-11 income year. | Detailed Reasoning - 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. To qualify, you must, immediately after the relevant payment is made, no longer have an interest in the paying 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 the your concessional or non-concessional contributions caps for the relevant income year. Because you transferred your whole entitlement in the Scheme to a complying Australian superannuation fund, you can make a valid election.

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