Private ruling: Lump sum payment from foreign pension scheme
Published: March 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014.

Ruling: Q1: Will any part of the lump sum benefit to be transferred from an overseas pension scheme (the Scheme) be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You were a member of an overseas pension scheme (the Scheme) prior to becoming a resident of Australia for taxation purposes on residency date. The Scheme is a retirement fund established and managed outside Australia. Under the terms of the Scheme, benefits are payable to members at: • retirement; or • early retirement due to ill health; or • death; and • early withdrawals for non-retirement purposes are not permitted. There have been no transfers into the Scheme from other foreign pension schemes since you became a resident of Australia. No contributions were made to the Scheme on or after your residency date. You wish to transfer your interest in the Scheme in full to Australia. The transfer value of your interest in the Scheme on a specified date in late 2014 (the specified date), the last date for which the Scheme has provided a guaranteed transfer value, was [amount] . You are unable to obtain from the Scheme the exact amount that was vested in you on the day before the residency date. You have agreed to a method to determine the lump sum value of your benefits in the Scheme for the day before residency date. The value of the lump sum on the day before residency date is translated into Australian dollars at the exchange rate on the date of receipt of the proposed transfer. The exchange rate, had you received the lump sum payment on the specified was used in this instance. You will no longer hold an interest in the Scheme.

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 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 subsection 10(1). | Superannuation Industry (Supervision) Act 1993 section 19. | Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision: Summary: On the basis of the information provided the 'applicable fund earnings' in respect of the lump sum payment from the Scheme is $[amount]. As you have not yet received a lump sum payment from the Scheme you will need to recalculate the assessable amount of the lump sum payment using the formula provided in the Detailed Reasoning when you receive the actual payment from the Scheme. The assessable amount that is calculated must be included in your income tax return in the income year the payment is received. As you will no longer have an interest in the Scheme after the transfer, you may be eligible to make an election to have the applicable fund earnings treated as assessable income of an Australian superannuation fund. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Section 305-70 of the ITAA 1997 applies to lump sum payments from foreign superannuation funds that are received more than six months after a person has become an Australian resident. In accordance with subsection 305-70(2) of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 of the ITAA 1997 is included in the assessable income of a person. The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income. The applicable fund earnings amount is 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 - 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. 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. 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 (SISA). In accordance with subsection 10(1) of the SISA, 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 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. 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 SISA, 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 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 (SISR)) 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 and the SISR. Therefore, in order for the lump sum payment from 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 turn to 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. In this case, it is evident that the Scheme is established outside of Australia; and its central management and control is outside of Australia. In addition, the information provided indicates your benefits in the Scheme are only payable upon death, retirement or early retirement in case of ill-health. Therefore, on the basis of the information provided, the Commissioner considers that the Scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 and section 305-70 of the ITAA 1997 applies to any payments from the Scheme. | Detailed Reasoning - Applicable fund earnings: You intend to transfer your interest in the Scheme more than six months after your residency date. Therefore, section 305-70 applies to include the 'applicable fund earnings' in your assessable income for the relevant year. 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). The effect of section 305-75 of the ITAA 1997 is that you are assessed only on the income you earned on your benefits in the Scheme less any contributions you made since you became a resident of Australia. Any earnings made 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 (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 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. | Detailed Reasoning - Amounts to be used in calculation: You are yet to transfer your benefits from the Scheme. Until that transfer takes place, we are unable to advise you of the actual figure to be included as assessable 'applicable fund earnings' in your tax return for the income year in which the transfer is made. However, we will show you how the applicable fund earnings are calculated by using as an example the transfer value of your benefits as at a specified date in late 2014. Please note that should the relevant amounts change then the 'applicable fund earnings' will need to be recalculated. The amount in the Scheme that was vested in you on the day before you became a resident of Australia is translated into Australian dollars at the exchange rate that applied on the day of receipt of the relevant superannuation lump sum. From the facts provided no contributions have been made to the Scheme since you migrated to Australia. There have been no transfers into the Scheme from other foreign pension schemes by you since becoming a resident of Australia. At a specified date in late 2014, your benefits in the Scheme were valued at [amount]. Therefore this is the amount vested in you if a transfer was made on the specified date. This amount is converted to Australian Dollars at the exchange rate on this date. For the purposes of paragraph 305-75(3)(c) of the ITAA 1997 'the period' commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. 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 following calculations is 1. Further, there are no previously exempt fund earnings for the purposes of paragraph 305-75(3)(d) of the ITAA 1997 in relation to the lump sum. Applying subsection 305-75(3) of the ITAA 1997 to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows: | Detailed Reasoning - Amount: Amount under subparagraph 305-75(3)(a)(i) $[amount] Amount under subparagraph 305-75(3)(a)(ii) 0.00 Amount under subparagraph 305-75(3)(a)(iii) 0.00 Amount under paragraph 305-75(3)(b) $[amount] Proportion under paragraph 305-75(3)(c) 1 Amount under paragraph 305-75(3)(d) 0.00 | Detailed Reasoning - Calculation of the assessable amount of the lump sum payment: 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) of the ITAA 1997. This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997. To this figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997. Therefore, your applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 is $[amount] and would be included as assessable applicable fund earnings in the your tax return for the 2014-15 income year if the payment was made on the specified date in late 2014. | Detailed Reasoning - Election: A taxpayer who transfers their overseas superannuation lump sum 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 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, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997. As you will no longer have an interest in Scheme after the transfer is made, and provided the other conditions are satisfied, you may be eligible to make the election.