Private ruling: Lump sum transfer from a foreign superannuation fund
Published: March 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is any part of the amount transferred from the taxpayer's overseas pension scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: Some years ago the taxpayer migrated to Australia and has been an Australian resident for tax purposes since the date of migration (the Residency Date). The taxpayer held an interest in a pension scheme (the Overseas Pension Scheme) established and controlled in an overseas country. The taxpayer was unable to provide the total value of their interest in the Overseas Pension Scheme on the day before the Residency Date. The taxpayer has agreed that the Australian Taxation Office estimate of the value of their interest in the Overseas Pension Scheme on the day before the Residency Date is accurate. The taxpayer cannot access their benefits in the Overseas Pension Scheme other than at retirement. There have been no contributions or pension amalgamations to the Overseas Pension Scheme since the taxpayer migrated to Australia. In the 2014-15 income year, the taxpayer's benefits in the Overseas Pension Scheme were transferred and credited into their superannuation account held in a complying superannuation fund in Australia (the Australian Fund). The taxpayer no longer has an interest in the Overseas Pension 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 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 subparagraph 305-75(3)(a)(i) | Income Tax Assessment Act 1997 subparagraph 305-75(3)(a)(ii) | Income Tax Assessment Act 1997 subparagraph 305-75(3)(a)(iii) | 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 960-50(1) | Income Tax Assessment Act 1997 subsection 960-50(4) | Income Tax Assessment Act 1997 subsection 960-50(6) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Regulations 1997 regulation 960.50.01 | 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: A portion of the lump sum payment transferred from the Overseas Pension Scheme to the Australian Fund should be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2014-15 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 ITAA 1997. 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 is worked out under either subsection 305-75(2) or 305-75(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. An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund. | 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. 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'. 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 that 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. It is evident that the Overseas Pension Scheme was established outside of Australia and has its central management and control outside of Australia. In addition, the information provided indicates that the taxpayer's benefits in the Overseas Pension Scheme are only payable upon retirement. Therefore, the Commissioner considers that the Overseas Pension Scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: The taxpayer became a resident of Australia for tax purposes on the Residency Date and received a lump sum payment in respect of their entitlements in the Overseas Pension Scheme during the 2014-15 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 the taxpayer's 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) of the ITAA 1997 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 Overseas Pension Scheme less any contributions made since they 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. 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. The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in this case: • item 11 which deals with a receipt or payment to which none of the other items apply, and • item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply. Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The payments the taxpayer received are not included in any of the other items in the table so they will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the time of receipt. When the amount in the Overseas Pension Scheme that was vested in the taxpayer just before they became a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency. Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances. In ATO Interpretative Decision ATO ID 2015/ 7, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from overseas superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in an overseas superannuation fund vested in a taxpayer just before they became a resident of Australia. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by deducting the Australian dollar equivalent of the amount vested in the Overseas Pension Scheme just before the day the taxpayer first became an Australian resident, from the amount received by the taxpayer from the Overseas Pension Scheme. Both amounts should be translated using the exchange rate applicable on the day of receipt. | Detailed Reasoning - Amounts to be used in calculations: During the 2014-15 income year, the benefits in the Overseas Pension Scheme were transferred directly into the Australian Fund. The amount was received in the form of a lump sum payment in Australian dollars. As this amount is already in Australian dollars, no further currency conversion is required. The agreed estimated value of the taxpayer's interest in the Overseas Pension Scheme on the day before the Residency Date is converted into Australian dollars at the exchange rate that applied on the day on which the lump sum was received. From the facts provided no contributions have been made to the Overseas Pension Scheme since the taxpayer migrated to Australia. There have also been no transfers into the Overseas Pension Scheme from other foreign pension schemes since the taxpayer became a resident of Australia. 'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the Residency Date and ceases on the day the lump sum is paid. The taxpayer was a resident for the whole of this 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. | Detailed Reasoning - Calculation of the assessable amount of the lump sum payment from the Overseas Pension Scheme: In accordance with subsection 305-75(3) of the ITAA 1997, the amounts determined at subparagraphs 305-75(3)(a)(i), (ii) and (iii) of the ITAA 1997 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. The result of this calculation is the portion of the lump sum payment transferred from the Overseas Pension Scheme to the Australian Fund which must be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2014-15 income year. | Detailed Reasoning - Election: A taxpayer who is 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 applicable fund earnings treated as the assessable income of the Australian superannuation fund. As a result, the amount specified in the election notice will be included in the 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 tax rate. To qualify, the taxpayer 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). As the taxpayer no longer has an interest in the Overseas Pension Scheme, they are eligible to make the election.