Private ruling: lump sum from a foreign superannuation fund
Date of advice: 15 June 2016
Published: August 2016

Ruling: Question | Is any part of the lump sum payment received by the taxpayer from an overseas scheme assessable as applicable fund earnings in accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Answer | Yes | This ruling applies for the following period: | Income year ending 30 June 2016 | The scheme commences on: | 1 July 2015


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 305-80) | Income Tax Assessment Act 1997 section 960-50 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: A portion of the lump sum payment transferred from the Scheme should be included as assessable 'applicable fund earnings' in your Client's tax return for the 2015-16 income year. | 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 subsection 305-75(3) of the ITAA 1997 where the person was not an Australian resident at all times during the person to which the lump sum relates. Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it must first be ascertained 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. Meaning of ' foreign superannuation fund' A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as: (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: 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 the 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. Therefore, 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 In this case, however, the entity making the lump sum payment is a statutory scheme established under the relevant laws of the overseas country. The entity is not a 'superannuation fund' as that term is normally understood. Monies are not set aside or pooled together in a separate fund ( Mahony v. Commissioner of Taxation (Cth) and Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v Commissioner of Taxation (Cth) [No2 ]). Rather, the benefits are paid out of the general revenue of the overseas country. Thus the statutory scheme referred to as the Scheme is not a superannuation fund and thus, not a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. However, subsection 305-55(2) of the ITAA 1997 extends the application of Subdivision 305-B, which deals with the taxation of superannuation benefits from foreign superannuation funds, to payments (other than pension payments) received from a scheme for the payment of benefits in the nature of superannuation upon retirement or death, provided the scheme: · is not, and never has been, an Australian superannuation fund or a foreign superannuation fund; and · was not established in Australia; and · is not centrally managed or controlled in Australia. As noted above, the Scheme is statutory scheme established under the relevant laws of the overseas country. The Scheme is set up for the express purpose of providing for the payment of benefits in the nature of superannuation upon retirement or death. Its central management and control is clearly not in Australia and it is neither an Australian superannuation fund nor a foreign superannuation fund. Therefore in accordance with subsection 305-55(2), Subdivision 305-B of Part 3-30 of Chapter 3 of the ITAA 1997 will apply to lump sum benefit payments from the Scheme made to Australian residents. | Detailed Reasoning - Applicable fund earnings: Your Client became a resident of Australia for tax purposes on the Residency Date and transferred their benefits more than six months after becoming an Australian resident. Accordingly, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) from the Scheme in your Client's assessable income. The 'applicable fund earnings' amount is worked out under subsection 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 income 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). This means that your Client is assessed only on the income earned on their benefits in the Scheme less any contributions they made since they became a resident of Australia. Any earnings made during the period of non-residency and transfers into the paying fund do not form part of the taxable amount when the overseas benefits are paid. | Detailed Reasoning - Foreign currency conversion: Subsection 960-50(1) of the ITAA 1997 provides that an amount in a foreign currency is to be translated into Australian currency ($A). The Commissioner's view on the application of this subsection in relation to section 305-75 of the ITAA 1997 is expressed in ATO ID 2015/7 which states the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount vested in the foreign fund just before the day the taxpayer first became an Australian resident, from the amount received from the foreign fund. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount should be calculated by: | Detailed Reasoning - Amounts to be used in calculation: The values of your Client's benefits in the Scheme on the day before your Client became an Australian resident for tax purposes were calculated, and these values are converted into Australian dollars at the exchange rate found on the ATO website that applied on the day of receipt of the lump sum. By using the exchange rate that applied on the day the benefits were transferred from the Scheme, the value of your Client's benefits in the Scheme as at the date before your Client became a resident has been converted from the overseas currency to Australian dollars. By using the exchange rate that applied on the day the benefits were transferred from the Scheme the value of your Client's transferred benefits in the Scheme have been converted from the overseas currency to Australian dollars. From the facts provided, no contributions or transfers have been made to the Scheme since your Client became a resident of Australia. '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. Your Client was a resident for tax purposes during the whole of these periods. Therefore, the Australian resident days and the total days are the same. As such, 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: 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. The result of the above calculation for the lump sum received from the Scheme is a positive amount which represents the applicable fund earnings. Accordingly, that portion of the lump sum payment received by your Client from the Scheme should be included as assessable 'applicable fund earnings' in your Client's income tax return for the 2015-2016 income year.

Relevant facts and: Your Client became a resident of Australia for tax purposes on a particular date, hereinafter referred to as the Residency Date. | While living overseas your Client was a member of a pension scheme (the Scheme) for the provision of retirement benefits. | The Scheme, which is a statutory scheme, is paid out from the overseas country's general revenue. | In the 2015-16 income year your Client, upon attaining 55 years of age, received a lump sum from the Scheme which was deposited into your Client's bank account. | There have been no contributions or pension amalgamations to the Scheme since the Client's Residency Date. | Your Client no longer has any interests in the Scheme. | Documentation from the Scheme has been provided which show the benefit amounts vested in your Client around the Residency date. | translating the amount received from each of the Pension Plans at the exchange rate applicable on the day of receipt to Australian dollars (A$); and | deducting from this amount, the amount in each of the Pension Plans that was vested in the Taxpayer just before the day they became an Australian resident at the exchange rate applicable on the day of receipt of the lump sums.