Private ruling: Lump sum payment from foreign fund
Date of advice: 3 June 2016
Published: July 2016
Ruling period: Year ended 30 June 20YY
Date scheme commenced: July 20XX

Ruling: Q1: Is any part of the lump sum benefit paid from a foreign pension fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: Your client was a member of a foreign fund (the Scheme) prior to becoming a resident of Australia for taxation purposes on the residency date. The Scheme is a retirement fund established and managed outside Australia. Under the terms of the Scheme, benefits cannot be accessed other than at death or retirement. There have been no transfers into the Scheme from other foreign pension schemes since your client became a resident of Australia. No contributions were made to the Scheme on or after the residency date. In the first quarter of 20YY, your client transferred their interest in the Scheme to their Australian bank account. The value of the benefits transferred from the Scheme on the transfer date, the date of receipt, was provided in foreign currency. The value of the benefits in the Scheme on the day before residency date was provided in foreign currency was also supplied. The ATO exchange rate on the date of receipt is published on the ATO website.

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 section 960-50. | 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 from the Scheme is $x . This amount must be included in the client's income tax return for the 20XX-YY income year. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Section 305-70 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum (if any) in their assessable income. In accordance with subsection 305-70(2) of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 of the ITAA 1997 is included in the assessable income of a person. The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income. The applicable fund earnings amount is 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. | Detailed Reasoning - Meaning of 'foreign superannuation fund': A foreign superannuation fund is defined in subsection 995-1(1) as a superannuation fund that is not an Australian superannuation fund. 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. | Detailed Reasoning - The meaning of 'superannuation fund': ' Superannuation fund ' is defined in subsection 995-1(1) as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA) which states: superannuation fund means (a) a fund that: (i) is an indefinitely continuing fund; and (ii) is a provident, benefit, superannuation or retirement fund; or (b) a public sector superannuation scheme. The High Court examined both the terms 'superannuation fund' and 'fund' in Scott v. Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; (1966) 10 AITR 290. 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. | Detailed Reasoning - Meaning of 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 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. 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 accordance with section 62 of the SISA (Sole purpose test), a regulated superannuation fund must be maintained solely for the provision of benefits specified in subsection 62(1) of the SISA. The 'core purposes' specified in that subsection relate to providing retirement or death benefits for, or in relation to, fund members; and the 'ancillary purposes' relate to the provision of benefits on the cessation of a member's employment, other death benefits and other approved benefits. ' Notwithstanding the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA ((and the Superannuation Industry (Supervision) Regulations 1994 (SISR)) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. In this case, it is evident that the Scheme is established outside of Australia; and its central management and control is outside of Australia. In addition, the information provided shows your client's benefits in the Scheme are only payable upon death or retirement. As such, the Scheme would meet the definition of a superannuation fund. Therefore, on the basis of the information provided, the Commissioner considers that the Scheme to be a foreign superannuation fund for the purposes of section 305-70 of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: In this case, the lump sum payment was made more than six months after your client became an Australian resident. Therefore, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in your client's assessable income for the relevant year. The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. 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). The effect of section 305-75 of the ITAA 1997 is that your client is assessed only on the income earned on their benefits in the Scheme less any contributions they made since they became a resident of Australia. Any earnings made 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 (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: • first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and • then, calculate the other amounts. In ATO Interpretative Decision ATO ID 2015/7, the Commissioner considers what is the correct rule for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' under section 305-75 and states that each amount in a foreign currency that is an element in the calculation is to be translated to Australian dollars at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. Therefore, for the purposes of section 305-70, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount in the Scheme vested in your client just before the day he became an Australian resident, from the amount received from the Scheme. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum. | Detailed Reasoning - Amounts to be used in calculation: The amount in the Scheme that was vested in your client on the day before they became a resident of Australia is translated into Australian dollars at the exchange rate that applied on the day of receipt of the relevant superannuation lump sum. From the facts provided no contributions have been made to the Scheme since your client migrated to Australia. There have been no transfers into the Scheme from other foreign pension schemes by your client since becoming a resident of Australia. The lump sum payment made from the Scheme to your client's Australian bank account is converted into Australian dollars at the exchange rate that applied on that day. For the purposes of paragraph 305-75(3)(c) of the ITAA 1997 'the period' 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 that period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the following calculations is 1. Further, there are no previously exempt fund earnings for the purposes of paragraph 305-75(3)(d) of the ITAA 1997 in relation to the lump sum. Applying subsection 305-75(3) of the ITAA 1997 to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows: | Detailed Reasoning - Amount: Amount under subparagraph 305-75(3)(a)(i) $x Amount under subparagraph 305-75(3)(a)(ii) 0.00 Amount under subparagraph 305-75(3)(a)(iii) 0.00 Amount under paragraph 305-75(3)(b) $x] Proportion under paragraph 305-75(3)(c) 1 Amount under paragraph 305-75(3)(d) 0.00 | Detailed Reasoning - Calculation of the assessable amount of the lump sum payment: In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at subparagraphs 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) of the ITAA 1997. This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997. To this figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997. Therefore, your client's applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 is $x and must be included as assessable income your client's income tax return for the 20XX-YY income year.