Private ruling: lump sum from a foreign pension scheme
Published: January 2012
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the lump sum payment from the overseas pension scheme included in assessable income as applicable fund earnings? | A1: Yes

Relevant facts and circumstances: 1. You are under age 75. 2. You worked in an overseas country for Entity 1 and then with Entity 2. 3. Entity 2 was created when Entity 1 merged with a third entity. 4. You receive two company pensions connected with your employment with Entity 1 and Entity 2. 5. The first being from Pension fund 1 relating to your employment for Entity 2 outside the overseas country; and the second being from Pension fund 2 during the last ten years of employment while a resident in the overseas country. 6. You retired in 2002. 7. You became an Australian resident for tax purposes in February 2004 (residency date). 8. Pension fund 1 has given you notice that the trustees have decided to wind up the fund because of the employer's insolvency and its inability to make good actuarial calculations of the fund's investment shortfalls. 9. The trustees are proposing to distribute the fund assets to the members of the Pension fund 1 in the form of a lump sum payment. 10. If you opt to take a cash payout from Pension fund 1 when they wind up, you expect to receive a lump sum payment from Pension fund 1 or alternatively you are considering a transfer of your lump sum payment to another overseas pension scheme; or to an Australian superannuation fund. 11. You will remain a member of Pension fund 1 until the fund is wound up, after which you will have no further interest in Pension fund 1. 12. There were no amounts transferred into Pension fund 1 from other superannuation funds after you became a 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 305-70. | 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 Subsection 305-75(5). | Income Tax Assessment Act 1997 Subsection 305-75(6). | Income Tax Assessment Act 1997 Section 307-65. | Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Subsection 960-50. | Income Tax Assessment Act 1997 Subsection 995-1(1). | Superannuation Industry (Supervision) Act 1993 Section 10. | Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision: Detailed Reasoning - Lump sum payments 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 are 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) of the ITAA 1997 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 of the ITAA 1997 will not have any application. | Detailed Reasoning - Foreign superannuation fund: (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. 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 each the lump sum payment from Pension fund 1 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 from the information provided that the Pension fund 1 is a superannuation scheme established outside of Australia for retirement purposes. The fund rules stipulate pensions are generally payable for members who reach the normal retirement date. Benefits generally only become payable on retirement, death or permanent incapacity. Early retirement benefits for a member who retire after reaching age 50 and before age 60 will generally be a reduced pension. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payable Pension fund 1 on winding up will be a lump sum payment 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 February 2004 and you anticipate receiving the lump sum payment from Pension fund 1 during the 2011-12 income year. As this will be more than 6 months after you became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in your assessable income in your 2011-12 income tax return.. 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). | Detailed Reasoning - Lump sum payments from foreign superannuation funds paid more than 6 months after becoming an Australian resident: You became a resident in February 2004. Therefore, the amount included as assessable income would be calculated under subsection 305-75(3) as you became an Australian resident after the start of the period to which the lump sum relates. Therefore you will be assessed only on the income earned (the accretion) in respect of the lump sum payment from Pension fund 1 less any contributions (if any) made since you became a resident of Australia. Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the scheme do not form part of the taxable amount when the lump sum benefit is paid. We note from the information provided, you indicate no contributions were made to Pension fund 1 by yourself or an employer after you became a resident as your pension commenced in June 2002. You also advised no amounts were transferred into the fund from other foreign superannuation funds during the period. | 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 (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, one needs to: · first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and · then, calculate the other amounts. For the purposes of section 305-70 of the ITAA 1997, the applicable fund earnings should be calculated by: · translating the lump sum payment received from the relevant pension plan at the exchange rate applicable on the day of receipt to AUD; and · deducting from this amount the AUD equivalent of the payment vested in the relevant pension plan at the exchange rate applicable on the day just before the residency date. | Detailed Reasoning - Calculation of Assessable Amount: In your case, as the lump sum payment has not yet been made, the calculation will be dependent on the final calculated amount of the lump sum payment and the value of the benefit vested in Pension fund 1 on the day just before your residency date. If necessary, this documentation should be obtained from Pension fund 1 before the lump sum payment is made. Dependent on the actual amounts calculated when translated into AUD, there may or may not be a portion that is assessable as applicable fund earnings . If there is an assessable amount, then that part of the lump sum payment received by you is to be included in your income tax return for the 2011-12 income year (or the relevant income year the payment is received) as applicable fund earnings . | Detailed Reasoning - Taxation of transfers from foreign superannuation funds: Generally, the applicable fund earnings (as calculated above) are included in the individual's assessable income. However, where the lump sum transfer represents payment of the individual's entire benefits in the foreign fund and those total benefits are paid directly into an Australian complying superannuation fund, the individual can choose (under section 305-80 of the ITAA 1997) to have all or part of the applicable fund earnings included in the assessable income of the Australian fund. An individual makes this choice by specifying an amount in the choice form (ATO Publication NAT 11724). Where the individual chooses to have all or part of the applicable fund earnings included in the Australian fund's assessable income, that amount is no longer included in the individual's assessable income. Where a payment from a foreign superannuation fund exceeds the 'amount vested' in the member at the time of transfer, that excess is assessable income to the Australian fund pursuant to subsection 295-200(1) of the ITAA 1997. The 'amounts vested' in the member are amounts that the member is legally entitled to on leaving the foreign superannuation fund. The part of the payment not covered by the choice form and therefore not included in the assessable income of the Australian fund, in most cases, will be included in the tax free component of the superannuation interest when eventually paid from the Australian fund. In most cases, the amount covered by the choice form that is included in the assessable income of the Australian fund will be included in the taxable component of the member's superannuation interest when eventually paid from the Australian fund. If a person is age 60 or over when receiving a superannuation benefit from an Australian complying fund, the benefit is not assessable income and is not exempt income unless the benefit includes an element untaxed in the fund.

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