Private ruling: lump sum payment from foreign superannuation fund
Published: July 2011
Ruling period: 2009-10 income year
Date scheme commenced: 1 July 2009

Ruling: Q1: What is the correct amount of 'applicable fund earnings' under section 305-70(2) of the Income Tax Assessment Act 1997 of the lump sum payment transferred from a foreign superannuation fund to an Australian superannuation fund? | A1: $ Amount D


Relevant legislative provisions: Subsection 295-95(2) of the Income Tax Assessment Act 1997 | Subsection 295-200(3) of the Income Tax Assessment Act 1997 | Subsection 305-60 of the Income Tax Assessment Act 1997 | Section 305-70 of the Income Tax Assessment Act 1997 | Subsection 305-70(1) of the Income Tax Assessment Act 1997 | Section 305-75 of the Income Tax Assessment Act 1997 | Subsection 305-75(2) of the Income Tax Assessment Act 1997 | Subsection 305-75 (3) of the Income Tax Assessment Act 1997 | Subsection 305-75 (5) of the Income Tax Assessment Act 1997 | Subsection 305-75 (6) of the Income Tax Assessment Act 1997 | Subsection 305-80 of the Income Tax Assessment Act 1997 | Subsection 306-70 of the Income Tax Assessment Act 1997 | Subsection 960-50(1) of the Income Tax Assessment Act 1997 | Subsection 960-50(4) of the Income Tax Assessment Act 1997 | Subsection 960-50(6) of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997 | Section 10 of the Superannuation Industry (Supervision) Act 1993 | Section19 of the Superannuation Industry (Supervision) Act 1993 | Section 62 of the Superannuation Industry (Supervision) Act 1993

Reasons for decision: Summary: The correct amount of the 'applicable fund earnings' in respect of the foreign superannuation fund transfer is Amount $ D However, given neither fund is under any legislative obligation to amend their income tax assessments to use the correct applicable fund earnings, amendment of the member contributions statement lodged by fund 2 is the only course of action available to alleviate the excess contributions tax problem. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that are 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 applicable fund earnings are 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 are the amount worked under either subsection 305-75(2) or subsection 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 superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and · 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: · the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and · at that time, the central management and control of the fund is ordinarily in Australia; and · at that time either the fund had no member covered by subsection (3) (an active member ) or at least 50% of: · the total *market value of the fund's assets attributable to *superannuation interests held by active members; or · 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 fund that: · is an indefinitely continuing fund; and · is a provident, benefit, superannuation or retirement fund; or · 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 amount that was transferred from the PPS 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. Looking at the overseas pension fund, it is evident it is established outside of Australia and the central management and control is outside of Australia. Retirement benefits are payable to members of the scheme at the relevant retirement ages (dependent on age, final pensionable pay and length of service). Compulsory retirement ages are generally age 60 and for higher rank officers, age 65. Therefore, on the basis of the information provided, the Commissioner considers the overseas pension fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 and any transfers from it to an Australian superannuation fund need to be considered under section 305-70 of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: Your client became a resident of Australia for tax purposes and the foreign fund transfer occurred some time later. As this was more than 6 months after your client became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your client's assessable income for the 2009 -10 income year. The 'applicable fund earnings' are worked out under section 305-75. 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: work out the total of the following amounts: · 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; · 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; · 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; · 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); · multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; · add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). In short, your client is assessed only on the income earned (the accretion) in respect of the foreign fund transfer less any contributions made since he became a resident of Australia. Further, any amounts representative of earnings 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) states 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: The overseas pension fund has advised the transfer value (the date your client became a resident) was 'foreign currency amount 1'. This will be used as the amount for the day before your client became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day. That rate converted the' foreign currency amount 1' to AU $ Amount 1. Statements from the transferring scheme (the overseas foreign fund) indicate no contributions were made to the scheme after this date. No amounts were transferred into the fund from other foreign superannuation funds during the period of membership. The total transfer value was the 'foreign currency amount 2'. Therefore this is the amount vested in your client when the transfer occurred. This is converted into Australian dollars at the exchange rate that applied on that day. This was done at the time of transfer and equals AU $ Amount 2. In accordance with the Commissioner's view '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 and ceases on the day the lump sum is paid. In your client's case, that period is from date X to date Y and your client was 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 calculation is 1. There are no previously exempt fund earnings in relation to the lump sum transfer. Therefore, applying subsection 305-75(3) to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows: 305-75(3)(a)(i) AU $ Amount 1 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) AU $ Amount 2 305-75(3)(c) 1 305-75(3)(d) Nil | 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. AU $ Amount 1 + nil + nil = AU $ Amount 1. This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $297,070. AU $ Amount 2 less AU $ Amount 1 = $D. This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1' $ D x 1 = $D To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil $D + nil = $D This is the amount of the lump sum payment transferred from the overseas pension fund to Fund 1 that are 'applicable fund earnings' under section 305-70 of the ITAA 1997 in the 2009-10 income year. | Detailed Reasoning - Taxation of transfers from foreign superannuation funds: Generally, the 'applicable fund earnings' (as calculated above) are included in the individual's assessable income. However, where the lump sum transfer represents payment of the individual's entire benefits in the foreign fund and those total benefits are paid directly into an Australian complying superannuation fund, the individual can choose to have all or part of the applicable fund earnings included in the assessable income of the Australian fund. An individual makes this choice by specifying an amount in the taxpayer's choice form (NAT 11724). Where the individual chooses to have all or part of the applicable fund earnings included in the fund's assessable income, that amount is no longer included in the individual's assessable income. Where a payment from a foreign superannuation fund exceeds the 'amount vested' in the member at the time of transfer, that excess is assessable income to the fund pursuant to subsection 295-200(1) of the ITAA 1997. The 'amounts vested' in the member are amounts that the member is legally entitled to on leaving the fund. The excess amount is known as the 'Assessable foreign fund amount'. | Detailed Reasoning - Treatment of amounts for excess contributions tax: Any amount covered by the choice form and included in the assessable income of the Australian fund will not be treated as either a concessional contribution or a non-concessional contribution. Currently, for your client this amount is AU $Amount 2 but should have been $D. In most cases, the amount will be included in the taxable component of the member's superannuation interest when eventually paid from the Australian fund. The part of the payment not covered by the choice form and therefore not included in the assessable income of the Australian fund (whether or not the amount is included in the individual's assessable income) is a non-concessional contribution and will count towards the non-concessional contributions cap. Currently for your client this amount is $nil but should have been AU $Amount 1. In most cases, the amount will be included in the tax free component of the superannuation interest when eventually paid from the Australian fund. The 'Assessable foreign fund amount' counts towards the concessional contributions cap. Your client does not have any 'Assessable foreign fund amount'. | Detailed Reasoning - Other relevant comments: Your client should request the fund (Fund 2) to lodge an amended member contributions statement.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: Your client is aged under 55. | Prior to becoming an Australian resident, your client (the taxpayer) was employed by an entity in an overseas country and was a member of an overseas pension scheme (the overseas pension fund), | The taxpayer joined the overseas pension fund some years ago and left that fund on the relevant date. | The overseas pension fund was administered by the pension unit of another entity. | The overseas pension fund has advised the transfer value of the taxpayer's benefit was 'foreign currency amount 1'. | Later, the taxpayer transferred their benefits 'foreign currency amount 2' from the overseas pension fund to an Australian superannuation fund (Fund 1). | The taxpayer then elected to have Fund 1 pay tax on the foreign super transfer by completing the form NAT 11724 (the choice form). | On the choice form, the taxpayer incorrectly stated the amount of the payment that their Australian super fund will pay tax on (at item 17) as AU $ Amount A. Consequently, 15% tax was deducted from this amount. | The taxpayer rolled the balance of his Fund 1 account (AU$ Amount B) to another Australian Fund (Fund 2). | Fund 1 completed a rollover benefits statement (RBS). At Section C it incorrectly showed the contributions made during the financial year as: | Assessable foreign fund amount AU $ Amount A | Based on the RBS from Fund 1, Fund 2 lodged the member contributions statement (MCS) for the 2009-10 income year. This also showed the amount of AU $Amount A as an 'assessable foreign fund amount'. | The taxpayer received correspondence from the Tax Office advising that based on current information, they had exceeded their concessional contributions cap for the 2009-10 income year by $ Amount C calculated as the AU $ Amount A of concessional contributions less $25,000 concessional contributions cap. | The amount of $Amount C (the excess concessional contributions amount) was also counted as non-concessional contributions towards the $450,000 non-concessional contributions (bring forward) cap. | Upon discovering their error of electing for Fund 1 to pay tax on the whole amount instead of just the 'applicable fund earnings', the taxpayer approached Fund 1. Fund 1 advised the taxpayer they could not rectify the situation as they had rolled over the super benefits to Fund 2. | Fund 2 also advised the taxpayer they could not rectify the situation as they had lodged the choice form with Fund 1.