Private ruling: Foreign fund transfer
Published: February 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is a surplus allocation lump sum received by a taxpayer (the Taxpayer) from a foreign fund (the Fund) assessable as applicable fund earnings as worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Taxpayer became a resident of Australia a number of years ago. While living overseas, the Taxpayer became a member of the Fund. The Fund was established in a foreign country under an act of parliament which governs the registration, incorporation, regulation and dissolution of pension funds. Benefits in the Fund comprise of prescribed employer contributions and employee contributions. In accordance with the Rules of the Fund, benefits are paid by the Fund: • on retirement at the normal retirement date; or • on voluntary early retirement provided that the member is at least age 55; or • on retirement after the normal retirement date with a maximum of age 69; or • on ill-health early retirement, at any date before the member's normal retirement date, where the member does not qualify for a benefit in terms of the separate disability; or • on the death of a member whilst in the service of an employer, to the member's dependants and/or nominees; or • at any date if a member's membership of the fund terminates prior to their normal retirement date for reasons of resignation, dismissal, retrenchment or redundancy. The Taxpayer ceased being a member of the Fund a number of years ago and no contributions have been made to the Fund since that time. Legislation introduced in the foreign country provided for the revaluation of pension funds and apportionment of surpluses to both current and former members. Consequently the Fund's Administrators issued a surplus statement which the Taxpayer received during the 2013-14 income year as a former member. The Taxpayer also received a lump sum payment during the 2013-14 income year. The payment is excluded from income tax in the foreign country.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-95(2) | Income Tax Assessment Act 1997 Subdivision 305-B | 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 Section 305-75 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Subsection 10(1) | Superannuation Industry (Supervision) Act 1993 Section 19 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: The whole amount of the lump sum surplus allocation received by the Taxpayer from the Fund should be included in the Taxpayer's assessable income for the 2013-14 income year. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds. Section 305-55 of the ITAA 1997 restricts the application of Subdivision 305-B of the ITAA 1997 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, section 305-70 of the ITAA 1997 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 apply. | Detailed Reasoning - Meaning of '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. | Detailed Reasoning - Meaning of 'superannuation fund': 'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA). Subsection 10(1) of the SISA provides that: superannuation fund means: (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 - Meaning of '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 judgment 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 accordance with section 62 of the SISA, a regulated superannuation fund must be maintained solely for: (a) one or more of the 'core purposes'; or (b) for one or more of the core purposes and for one or more of the 'ancillary purposes'. For the purposes of section 62 of the SISA, 'core purposes' means the provision of benefits: • on or after retirement from gainful employment; or • on attaining a prescribed age; or • on the member's death if the death occurred before the member's retirement or attaining the prescribed age. In accordance with paragraph 62(1)(b) of the SISA, 'ancillary purposes' means: • the provision of benefits on or after termination of member's employment with an employer who had at any time contributed to the fund in relation to the member; or • provision of benefits on or after cessation of work on account of ill-health; or • provision of benefits on member's death if the death of the member occurred after member's retirement. Notwithstanding the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and the Superannuation Industry (Supervision) Regulations 1994 ) 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 SISA. It is evident that the Fund is established outside of Australia and has its central management and control outside of Australia. In addition, information available indicates that the character of benefits provided by the Fund is similar to the type of benefits specified under the SISA. That is, benefits are paid to Fund members on retirement, invalidity, termination of employment or death. As such, the Fund is a superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997 Therefore, on the basis of the information provided, the Commissioner considers that a surplus allocation from the Fund is received from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997. Consequently, Subdivision 305-B of the ITAA 1997 applies to lump sum surplus allocation received by the Taxpayer from the Fund. | Detailed Reasoning - Applicable fund earnings: The Taxpayer became a resident of Australia for tax purposes a number of years ago and received lump sum payment in respect of their entitlements in the Fund during the 2013-14 income year. As this payment occurred more than six months after the Taxpayer became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in their assessable income for the relevant year. The 'applicable fund earnings' amount is 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). The effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the Fund less any contributions made since they became a resident of Australia. Any earnings made during periods of non-residency, and transfers into the 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) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 to amounts that are elements in the calculation of another amount you need 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 amount in the Fund that was vested in the Taxpayer when the lump sum was paid at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table to subsection 960-50(6)of the ITAA 1997); and • deducting from this amount the Australian dollar equivalent of the amount vested in the Fund at the rate applicable just before the start day (item 11A of the table to subsection 960-50(6) of the ITAA 1997. Refer to regulation 960.50.01 of the Income Tax Assessment Regulations 1997 ). | Detailed Reasoning - Amounts to be used in calculation: As the Taxpayer ceased to be a member of the Fund some years before they became a resident of Australia, the value of their benefits in the Fund on the day before they became a resident for tax purposes was 0.00. This is converted into Australian dollars (A$) at the exchange rate that applied on that day. Therefore, the amount vested in the Fund just before the day the Taxpayer became an Australian resident is A$0.00 . From the facts provided no contributions have been made to the overseas pension fund since the Taxpayer became an Australian resident. The amount received in the 2013-14 income year is converted into Australian dollars at the exchange rate that applied on the date the payment was received. '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. In the Taxpayer's case, that period would have been from the date they became an Australian resident to the date they received the payment, provided the Taxpayer was a resident for the whole of that period. There are no previously exempt fund earnings in relation to the lump sum. | Detailed Reasoning - Calculation of the assessable amount of the payment from the Fund: 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. 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 amount vested in the Fund just before the day the Taxpayer became an Australian resident was A$0.00 , the entire amount of the lump sum allocation received from the Fund should be included in the Taxpayer's income tax return for the 2013-14 income year as assessable 'applicable fund earnings' amount.