Private ruling: Lump sum payment from foreign fund
Published: June 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the lump sum payment your client received from their overseas retirement account assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment 1997 (ITAA 1997)? Advice/Answers Yes.

Relevant facts and circumstances: Your client holds an overseas retirement account. The overseas retirement account is established outside of Australia Funds in the overseas retirement account can only be used to accumulate retirement income. Ordinarily, the funds cannot be paid out in cash, but instead must be used to provide income when a member retires. Your client became a resident of Australia for tax purposes in the 2004-05 income year. On turning age 60 your client sought to move their funds in the overseas retirement account to Australia. In the 2012-13 income year your client moved half of their funds in the overseas retirement account. The amount was withdrawn from the overseas retirement account. Foreign withholding tax was paid and the net amount was converted into Australian Dollars and deposited into your client's account. An amount was immediately deposited into your client's Australian superannuation fund as a non-concessional contribution. The remaining balance was transferred into your client's savings account. Your client has not made any contributions to the overseas retirement account since they became a resident of Australia. No amounts have been transferred into the overseas retirement account from other foreign superannuation funds after your client became a resident of Australia.

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 305-75(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 Section 960-50. | 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 770-10(1). | Income Tax Assessment Act 1997 Subsection 995-1(1). Further issues for you to consider

Reasons for decision: Summary: The applicable fund earnings is to be included as assessable income in your client's tax return for the 2012-13 income year and is subject to tax at their marginal rate. Your client may be entitled to a credit in respect of the foreign tax paid on the amount representing the applicable fund earnings. | 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 Income Tax Assessment Act 1997 (ITAA 1997). 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 subsections 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 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 will not have any application. | Detailed Reasoning - 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 funds 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 (a) a public sector superannuation scheme; | Detailed Reasoning - 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 the lump sum payment 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). 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 the present case, your client holds an overseas retirement account. The funds can only be used to accumulate retirement income. Ordinarily, the funds cannot be paid out in cash, but instead must be used to provide income when a member retires. Similar to an Australian superannuation fund, there are instances where a member can gain 'special access' to their funds prior to retirement age. These situations however, do not exclude the overseas retirement account from being recognised as a foreign superannuation fund. Based on the above, the overseas retirement account meets the definition of superannuation fund as funds are ordinarily only obtainable once the member reaches retirement age and early or special access provisions effectively mirror those of Australian legislation. In addition, it is clear the overseas retirement account is established outside of Australia with its central management and control outside of Australia. Therefore, on this basis, together with the above, the Commissioner considers that the lump sum your client received to be from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Assessable Amount: As noted above, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a person's assessable income where the payment is received more than six months after a person has become an Australian resident. Your client became a resident of Australia for tax purposes in the 2004-05 income year (the residency date). In the 2012-13 income year half of your client's balance in the overseas retirement account was transferred to Australia. The date on which your client received the lump sum benefit is more than six months after they became an Australian resident. Accordingly, a portion of the lump sum benefit will be assessable under section 305-70 of the ITAA 1997. The amount included as assessable income is calculated under subsection 305-75(3) of the ITAA 1997 because you became an Australian resident after the start of the period to which the lump sum relates. Subsection 305-75(3) states: If you become an Australian resident after the start of the period to which the lump sum relates (but before you received it) 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 remainder of 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 calculation of this portion effectively means that your client will be assessed only on the income earned while they were a resident of Australia. That is, your client will only be assessed on the accretion in their benefits less any contributions made since they became a resident of Australia. Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred 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) states when applying section 960-50 to amounts that are elements in the calculation of another amount you need to: (a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and (b) 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: Ÿ item 11 which deals with a receipt or payment to which none of the other items apply, and Ÿ 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 payment your client finally received is not included in any of the other items in the table so it 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 foreign fund that was vested in your client 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 (ITAR) 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. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars and deducting from this amount the Australian dollar equivalent of the amount vested in the fund at the exchange rate applicable just before the day your client first became an Australian resident. | Detailed Reasoning - Calculation of the assessable amount of the payment from foreign superannuation fund: In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 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). The applicable fund earnings is to be included as assessable income in your client's tax return for the 2012-13 income year and is subject to tax at their marginal rate. Please note that your client may be entitled to a credit in respect of the overseas tax paid on the amount representing the applicable fund earnings. In respect of foreign tax paid on lump sum payments, subsection 770-10(1) of the ITAA 1997 states : You are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.