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

Ruling: Q1: Is any part of the lump sum payment paid to your client from a foreign pension fund assessable as applicable fund earnings? | A1: Yes

Relevant facts and circumstances: Your client migrated to Australia several years ago. Your client held an interest in an overseas Pension Fund (the Pension Fund). The Pension Fund is an employer sponsored superannuation fund. Whilst a member of the Pension Fund your client made personal contributions during your client's employment with the overseas employer. There have been no contributions to the Pension Fund since your client migrated to Australia. Funds cannot be accessed from the Pension Fund other than at retirement. You agreed that the transfer value of the benefits in the Fund on the residency date before your client became a resident of Australia is an amount. Your client's benefits in the Pension Fund were transferred to your client's bank account in Australia. Your client is receiving monthly pension income from the Pension Fund.

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 306-70 | 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 Summary | An amount paid to your client from the Pension Fund will be included as assessable 'applicable fund earnings' in your client's tax return for the relevant income year. | 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 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) 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 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. | 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. | In this case, the lump sum benefit was paid from the Pension Fund. It is evident that the Pension Fund is a fund established in overseas and is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. | Based on the information provided, the Commissioner considers that the Pension Fund is a foreign superannuation fund as defined in subsection 995-1(1). | 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 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. | The documentation provided indicates your client's pension benefit in the Pension Fund is only payable upon retirement and the fund would meet the definition of a superannuation fund. In addition, it is clear the payer of the lump sum payment was established outside of Australia with their central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment received was from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Applicable fund earnings | Your client became a resident of Australia for tax purposes several years ago and received the lump sum payment in respect of her entitlement in the Pension Fund in the relevant income year. As this was more than six months after your client 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: | (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 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). | In short, your client is assessed only on the income earned (the accretion) in respect of your client's pension with the Pension Fund less any contributions your client made since your client became a resident of Australia. Any amounts representative of earnings during periods of non-residency, and transfers into an institution 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: | 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 she 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. | Amounts to be used in calculation | The value of the benefit in the Pension Fund on the day before your client became a resident of Australia is converted into Australian dollars at the exchange rate that applied on that day. | From the facts provided no contributions have been made to the pension scheme since your client migrated to Australia. | During the relevant income year, your client's benefits in the Pension Fund were paid out to your client in the form of a one-off lump sum. Therefore, this is the amount vested in your client when the lump sum was paid. Please note that the payment date was on a weekend. In an ATO fact sheet titled 'Foreign exchange rates Translation (conversion) to Australian dollars - foreign currency exchange rates to use', the exchange rate applicable on a weekend or public holiday is the rate for the next closest 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. Your client was a resident for the whole of this 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. | 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) The amount, converted to Australian dollars, vested in your client before they became a resident of Australia | 305-75(3)(a)(ii) Nil | 305-75(3)(a)(iii) Nil | 305-75(3)(b) The amount of the lump sum payment received, converted to Australian dollars | 305-75(3)(c) 1 | 305-75(3)(d) Nil | Calculation of the assessable amount of the payment from the Pension Fund | 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 amount is greater than zero, this portion of the lump sum payment paid directly to your client will be included as assessable 'applicable fund earnings' in your client's tax return for the relevant income year.