Private ruling: Lump sum payments from a foreign pension plan.
Published: November 2012
Ruling period: For the year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the lump sum payment your client received from their foreign fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: Your client previously resided in a foreign country for a period of seven years. After three years on a working visa they became a resident of this country. Your client engaged in employment during this time. Your client returned to Australia and became a resident of Australia for tax purposes during the 2007-08 income year. Your client was previously a member of registered pension plan, (Pension Plan 1), which provides its members with defined benefit plans. Your client has stated that they became a member of Pension Plan 1 when they commenced employment in the foreign country towards the end of the 2001 calendar year. Pension Plan 1 provides its members with options to transfer their benefits out once they terminate their membership with the plan. These options specify that the funds must remain 'locked-in' and include transferring benefits to other locked in funds; being either a locked-in retirement account (LIRA), a life income fund (LIF), a locked-in retirement income fund (LRIF), transfer to another registered pension plan (RPP) or benefits can also be used to purchase a deferred life annuity. When your client's employment was terminated with their foreign employer their membership with Pension Plan 1 was terminated during the 2008-09 income year. The amount in Pension Plan 1 on that date was A. Your client had the option to receive a lump sum payment (which was required to be put into a locked-in account) or receive a deferred pension. They opted for the lump sum. During the 2008-09 income year your client signed the forms authorising the transfer of the money from Pension Plan 1 to another fund (Pension Plan 2;) a Locked-In Plan. The locked-in account was opened during the 2008-09 income year. During the same year, B was deposited into the Pension Plan 2. No amounts were transferred into Pension Plan 2 from other foreign superannuation funds, nor were any further contributions made after this initial transfer. Changes to the applicable foreign law, now allow for non-residents of the foreign country to unlock and withdraw their funds from their locked-in accounts two years after departing the foreign country. Your client satisfied the requirements of non residency and was able to withdraw the funds from Pension Plan 2. During the 2011-12 income year your client transferred C in full to Australia. This amount was subject to foreign income tax. Assumptions The applicant could not obtain the value of Pension Plan 1 as at the day preceding Australian residency. The closest date to residency they could obtain was less than 2 months after residency and the value of the fund on that date was A. As this is less than two months after the residency date, the Commissioner considers that the difference in the value of Pension Plan 1 between these dates to be immaterial. As such, it is assumed that the value on the day before your client became an Australian resident was A. There is insufficient evidence, on the Pension Plan 1 website and other sources, to indicate that members can access their funds prior to retirement (55 years where members elect 'early retirement', otherwise 60). There is no mention of members having the option to participate in the Home Buyers Plan (HBP) or the Lifelong Leaning Plan (LLP) or other schemes requiring partial withdrawal of funds. As such, the Commissioner accepts that funds cannot be accessed from the plan, other than at retirement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-70. | Income Tax Assessment Act 1997 Subsection 305-70(2). | Income Tax Assessment Act 1997 Subsection 305-70(3). | 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 Paragraph 305-75(3)(a). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(b). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(c). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(d). | Income Tax Assessment Act 1997 Subsection 305-75(5). | Income Tax Assessment Act 1997 Subsection 305-75(6). | 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 Section 960-50. | 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. | Income Tax Assessment Regulations 1997 Regulations 960-50.01.

Reasons for decision: Summary: The applicable fund earnings is calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of transfer into Australian dollars (AUD), and deducting from this amount the AUD equivalent of the amount vested in the fund on the day just before your client first became an Australian resident at the exchange rate applicable on that day. The applicable fund earnings in respect of the lump sum payment made from pension Plan 2 is calculated as X. This is to be included in your client's assessable income and is subject to tax at their marginal rates. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: The applicable fund earnings in relation to a lump sum payment (LSP) from a foreign superannuation fund that is transferred or 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 LSP 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 subsection 305-75(3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 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. 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 an 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. 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) a fund that: i. is an indefinitely continuing fund; and ii. is a provident, benefit, superannuation or retirement fund; or (a) a public sector superannuation scheme; 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 lump sum payment 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). 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. In the present case, we must look at both Pension Plan 1 and Pension Plan 2. Pension Plan 1 is a plan where funds are set aside by an employer, an employee, or both to provide a pension when the employee retires. Under the applicable foreign laws, after a period of time (usually between two and five years after joining the plan), all money in the plan becomes fully vested in the plan member. This means that while the member owns all the money in the plan, they can only access the funds under predetermined circumstances, for example, when the member reaches retirement age. When your client's employment was terminated, their membership with pension Plan 1 was also terminated. As your client's plan was fully vested at the time of termination, the proceeds of the plan were considered 'locked-in'. As stated in the facts, these funds could only be transferred to other locked-in accounts. It has also been accepted that as there is insufficient evidence to indicate that members have the option to participate in the Home Buyers Plan (HBP) or the Lifelong Leaning Plan (LLP) or other schemes requiring partial withdrawal of funds, your client's proceeds in Pension Plan 1 cannot be accessed from the fund other than at retirement. Based on the above, the Pension Plan 1 would meet the definition of superannuation fund. In addition, it is clear the plan is established outside of Australia with its central management and control outside of Australia. Therefore on this basis, together with the above, the Commissioner considers Pension Plan 1 to be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. As stated above, once your client's membership with pension Plan 1 was terminated, their locked-in funds had to be transferred to another locked-in account. According to the facts, during the 2008-09 income year your client signed the forms authorising the transfer of the money from Pension Plan 1 to Pension Plan 2; a Locked-In Pension Plan which was opened during the 2008-09 income year. The funds in Pension Plan 2 are 'locked-in' and can only be used to accumulate retirement income. Ordinarily, the funds cannot be paid out in cash, but instead must be used to provide income when the plan member retires. Further, the funds cannot be used to participate in the HBP or the LLP. Similar to an Australian superannuation fund, there are instances where a member can gain 'special access' to their funds prior to retirement age. Withdrawals under special access are permitted where: · The plan member has an illness or physical disability that is likely to shorten the member's life expectancy to less than two years; · The member is age 55 years or older and the total value of the funds in the member's locked-in accounts is less than a specified amount; · The member's locked-in assets exceed prescribed limits. As this situation attracts penalties, members have the opportunity to withdraw excess assets in order to avoid paying the penalty in future; and · The member is facing certain types of financial hardship which are specified under the applicable foreign legislation. These situations however, do not exclude Pension Plan 2 from being recognised as a foreign superannuation fund. Changes to the applicable foreign law now allow for non-residents of the foreign country to unlock and withdraw their funds from their locked-in accounts two years after departing the country. From the facts, your client satisfied the requirements of non-residency and was able to withdraw the funds from Pension Plan 2. Again, the fact that your client was able to withdraw their funds as they were a non-resident does not disqualify Pension Plan 2 from being a treated as a foreign superannuation fund. This is because under current Australian legislation, temporary residents of Australia who had visited on a temporary visa listed under the Migration Act 1958 are able to request that their super be cashed once they had left Australia and their visa had ceased to be in effect. Such payments are referred to as Departing Australia Superannuation Payments (DASP). Based on the above, Pension Plan 2 would meet the definition of superannuation fund as funds are ordinarily only obtainable once the member reaches retirement age and early or special access provisions effectively mirror those of Australian legislation. In addition, it is clear Pension Plan 2, as the payer of the lump sum, is established outside of Australia with its central management and control outside of Australia. Therefore, on this basis, together with the above, the Commissioner considers that the lump sum your client received to be from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. Calculation of Assessable Amount Your client became a resident of Australia for tax purposes during the 2007-08 income year and the payment was made during the 2011-12 income year. As this is more than 6 months after they became an Australian resident section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in their assessable income. The 'applicable fund earnings' are 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 (but before you received it) 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 remainder of 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 the foreign fund less any contributions they made since becoming 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 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 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 they 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. | Detailed Reasoning - Amounts to be used in calculation: It is accepted that the value of your client's benefits on the day before they became an Australian resident) was A. At this point in time, the funds were held in Pension Plan 1. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of A to A (cents ignored). During the 2008-09 income year, B was transferred from Pension Plan 1 to Pension Plan 2 and Pension Plan 1 was then closed. This was merely a transfer of funds from one foreign superannuation fund to another and therefore does not impact on the calculation of any applicable fund earnings. No amounts were transferred into Pension Plan 2 from other foreign superannuation funds, nor were any further contributions made after this initial transfer. During the 2011-12 income year, your client's benefits in Pension Plan 2 were paid out in the form of a one-off lump sum of C. This is converted into Australian dollars at the exchange rate that applied on that day. As this day fell on a weekend, the next available rate will be used which converts the amount of C to C (cents ignored). 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, they were 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. 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) A 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) C 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. A + nil + nil = A This total is then subtracted from the amount determined under paragraph 305-75(3)(b), C C - A = 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. The applicable fund earnings of D is to be included as assessable income in your client's tax return for the 2011-12 income year and is subject to tax at their marginal rate.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts and circumstances Your client is below 40 years of age. | Relevant legislative provisions Income Tax Assessment Act 1997 Subsection 295-95(2).