Private ruling: Lump sum payment from foreign fund
Published: January 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 20ZZ

Ruling: Q1: Is any part of the benefit transferred from an overseas pension scheme to a superannuation fund in Australia assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997? | A1: Yes.

Relevant facts and circumstances: Your client was granted permanent residence in early 20XX. Your client migrated to Australia in mid-20XX. In 20YY a foreign fund, (Fund A), established a policy for your client with a single investment amount. In late 20ZZ your client transferred an amount from Fund A to an Australian complying superannuation fund (Fund B) capable of receiving foreign pension transfers. The transfer from the foreign pension scheme represents the entire interest in the foreign pension scheme. No contributions were made to the foreign pension scheme and there were no amounts transferred into the foreign pension scheme from any other foreign superannuation fund during the relevant period. Funds in the foreign pension scheme cannot be accessed, other than at retirement.

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 305-75 (5) | Income Tax Assessment Act 1997 Subsection 305-75 (6) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 19 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: A portion of the lump sum transferred from Fund A to Fund B will be included as assessable 'applicable fund earnings' in your client's tax return for the relevant income year. Alternatively, your client can choose to include all or part of the applicable fund earnings in the assessable income of Fund B. | Detailed Reasoning - Detailed Reasoning: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997). Under section 305-70 of the ITAA 1997 any applicable funds 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, is assessable income. Therefore, any applicable fund earnings in relation to the transfer of funds your client received from the foreign pension scheme is bought to account as statutory income. | 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 is subject to tax at the person's marginal rate. 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 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 was 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. 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. However, part of the definition of a foreign superannuation fund also requires consideration of what constitutes a superannuation or retirement fund. | Detailed Reasoning - 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 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 Superannuation Industry (Supervision) Act 1993 (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 from the overseas fund 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) 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. Information available indicates that benefits in Fund A are only payable upon retirement and therefore Fund A meets the definition of superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with its central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment from Fund A was from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: Your client became a resident of Australia for income tax purposes during the relevant income year and your client received a lump sum payment from Fund A in late 20ZZ. As this was more than six months after your client became an Australian resident, section 305-70 applies to include any 'applicable fund earnings' in your client's assessable income. The 'applicable fund earnings' are worked out under section 305-75. As mentioned earlier, 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(2) of the ITAA 1997 states: If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day ); (ii) the part of the lump sum (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) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). In short, your client is assessed on the income earned (the accretion) in respect of the foreign lump sum received during their period of residency. | 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$). For the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by: · converting the lump sum payment received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table to subsection 960-50(6)) and; · deducting from this amount the Australian dollar equivalent of the payment vested in the overseas superannuation fund at the exchange rate applicable on the day immediately before the residency date (item 11A of the table to subsection 960-50(6)). | Detailed Reasoning - Calculation of the assessable amount of the payment from the foreign fund: In accordance with subsection 305-75(2) of the ITAA 1997, the amounts determined at sub-paragraphs 305-75(2)(a)(i) and (ii) are added. This total is then subtracted from the amount determined under paragraph 305-75(2)(b). To this figure we add any previously exempt fund earnings, which in this case, is nil. As the final amount is greater than zero, a portion of the amount of the lump sum payment from Fund A will be included as assessable 'applicable fund earnings' in your client's tax return for the relevant income year. Alternatively, as the lump sum payment from Fund A was transferred to an Australian complying superannuation fund and your client no longer has a superannuation interest in Fund A, your client can choose under section 305-80 of the ITAA 1997 to include all, or part of, the applicable fund earnings in the assessable income of the Australian complying superannuation fund.