Private ruling: Lump sum payment from foreign superannuation fund
Published: April 2012
Ruling period: 2011-12 income year
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the lump sum received from a foreign retirement scheme included in your income as 'applicable fund earnings'? If your 'applicable fund earnings' from a lump sum payment received from a foreign retirement scheme are less then zero, can you deduct the negative value for income tax purposes in the 2011-12 income year? | A1: No. No.

Relevant facts and circumstances: You ceased employment in an overseas country during the 2005-06 income year. You became an Australian resident for tax purposes during the 2005-06 income year. An overseas pension fund (Pension Fund) is making the payment. The Pension Fund was an employer sponsored pension fund. Your holdings within the Fund comprised three elements: · X Scheme component; · Y Scheme component; and · Z Scheme component. The Members' Handbook for the Pension Fund includes a calculation of the pension where a member leaves the Pension Fund. As part of the formula for the calculation of the pension, if a member leaves before the Normal Retirement Date (the member's 65 th birthday) the part of the pension which exceeds the Guaranteed Minimum Pension will be increased in the period between the date of leaving service and Normal Retirement date by a specific per annum compound. The value of the total benefits held within the Fund as at a specific date during the 2011-12 income year was an amount and was transferred on the same day. The full transfer value of the benefits was rolled into a complying superannuation fund. You no longer hold any interests in the Pension Fund. You have not made any contributions to the Pension Fund since a specific date during the 2005-06 income year. You advised your previous employer has not made any contributions to your X Scheme component or Y Scheme component since a specific date during the 2005-06 income year. You are under 65 years of age. Your normal retirement date is several years away. A letter from the Pension Fund to the Australian superannuation fund during the 2011-12 income year stated that an amount be transferred to a superannuation account during the 2011-12 income year. An amount relates to the Z Scheme component Transfer Value and an amount relates to the Money Purchase Transfer Value. In addition, the letter states there were nil Y Scheme amounts in the payment. The Transfer Value of the Z Scheme component as at a specific date during the 2005-06 income year is calculated to be an amount. A statement from the Pension Fund states that the transfer value of the X Scheme component as at a specific date during the 2005-06 income year is an amount. You have agreed in our telephone conversation on a specific date during the 2011-12 income year to use the previous 2 amounts to give a total transfer value at the date you became a resident.

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 Subsection 305-75 (5) | Income Tax Assessment Act 1997 Subsection 305-75 (6) | Income Tax Assessment Act 1997 Section 305-80 | Income Tax Assessment Act 1997 subsection 305-80(1) | Income Tax Assessment Act 1997 subsection 305-80(2) | Income Tax Assessment Act 1997 subsection 305-80(3) Income Tax Assessment Act 1997 Subsection 960-50(1) | Income Tax Assessment Act 1997 Subsection 960-50(4) | 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: The 'applicable fund earnings' in respect of the lump sum payment paid from the Pension Fund is calculated as zero. Consequently, no amount of the lump sum payment from the Pension Fund will be included in your assessable income in the 2011-12 income year. There is no provision in the income tax legislation that will enable a negative value for 'applicable fund earnings' paid by a foreign retirement scheme to be deducted from your income tax assessment or by your Australian superannuation fund. | Detailed Reasoning - 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 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 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. 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. 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 (SIS Act), which requires that the fund is a provident, benefit, superannuation or retirement fund. Provident, benefit, superannuation or retirement fund 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'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. From the information provided about the fund it is evident the Pension Fund only provides benefits on retirement and therefore meets the definition of a superannuation fund. In addition, as the fund is established outside of Australia with its central management and control also outside of Australia, the Commissioner considers that the Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. Applicable fund earnings You became a resident of Australia for tax purposes on 22 March 2006 and received the lump sum payment in respect of the Pension Fund during the 2011-12 income year. As this was more than six months after you became an Australian resident, section 305-70 applies to include the '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(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, you are assessed only on the income earned (the accretion) in respect of the Pension Fund less any contributions you made since you 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. 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$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that 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 your 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 payment you 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 you just before you 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 you first became an Australian resident. Amounts to be used in calculation You advised that you do not have the transfer value of the Z Scheme component on the day before you became a resident of Australia. However you have provided sufficient information to calculate the Transfer Value on the day before you became a resident of Australia. The Members' Handbook for the Pension Fund includes a calculation of the pension where a member leaves the Pension Fund. As part of the formula for the calculation of the pension, if a member leaves before the Normal Retirement Date (the member's 65 th birthday) the part of the pension which exceeds the Guaranteed Minimum Pension will be increased in the period between the date of leaving service and Normal Retirement Date by a specific % per annum compound. As you retired from the Pension Fund before your Normal Retirement Date, we have used a rate of increase in the fund of a specific % in the calculation of the applicable fund earnings for the Z Scheme on the day before you became a resident of Australia. A letter from the Pension Fund to an Australian superannuation fund during the 2011-12 income year stated that the total Transfer value on a specific date during the 2011-12 income year was an amount. This consisted of an amount for the Z Scheme component and £3260.63 for the X Scheme component. The letter also advised there were no Y Scheme component in the payment. By reducing the amount (Z Scheme component on a specific date during the 2011-12 income year) by the specific % rate per annum, the Transfer Value of the Z Scheme component as at the day before you became a resident of Australia is an amount. A statement from the Pension Fund states that the transfer value of the X Scheme component as at a specific date during the 2005-06 income year is an amount. Therefore, the total amount of the transfer value of the benefit in the Pension Fund on (the day before you became a resident of Australia) is an amount. (The amount is calculated by adding the Transfer Value of the Z Scheme component to the Transfer Value of the X Scheme component). The amount is converted into Australian dollars at the exchange rate that applied on that day. No contributions have been made to the Pension Fund since you migrated to Australia. On a specific date during the 2011-12 income year, your benefits in the Pension Fund were paid out to you in the form of a one-off lump sum which was transferred directly into a complying Australian superannuation fund. Therefore this is the amount vested in you when the lump sum was paid. This was converted into Australian dollars at the exchange rate that applied on that day. '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 a specific date during the 2005-06 income year to a specific date during the 2011-12 income year. You were a resident for the whole of both those periods. 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. Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings for the Pension Fund are as follows: 305-75(3)(a)(i) An amount 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) An amount 305-75(3)(c) 1 305-75(3)(d) Nil Calculation of the assessable amount of the payment from Pension Fund 2 In accordance with subsection 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). As the result is a negative value, the applicable fund earnings are nil. Therefore no amount of the lump sum payment from the Pension Fund is to be included in your income tax return for the 2011-12 income year as 'applicable fund earnings'. Please note that there is no provision in the income tax legislation that will enable a negative value for applicable fund earnings to be deducted from your income tax assessment or by your Australian superannuation fund. | Detailed Reasoning - Conclusion:: No part of the lump sum payment from the Pension Fund which was transferred to your Australian superannuation fund is assessable as the applicable fund earnings relating to the payment are nil.

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