Private ruling: Lump sum payment from a foreign superannuation fund
Published: April 2015
Ruling period: Income year ending 30 June 2015
Date scheme commenced: 1 July 2014.

Ruling: Q1: Will any part of the benefit to be transferred from a foreign pension fund to an Australian superannuation fund be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You became an Australian resident several years ago. You hold an interest in a foreign pension fund (the Foreign Fund) which is a pension scheme established and controlled in an overseas country (the Foreign Country). You are unable to obtain the value of your interest in the Foreign Fund that was vested in you the day before you became an Australian resident. Consequently, you agreed to an estimated value of your interest at that date. You cannot access your benefits in the Foreign Fund other than at retirement in the Foreign Country. There have been no contributions to the Foreign Fund since you migrated to Australia. You provided an estimate of your benefit in the Foreign Fund as at early 2015. You intend to transfer your entire benefit in the Foreign Fund to a complying Australian superannuation fund (the Australian 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 305-80(1) | Income Tax Assessment Act 1997 Subsection 305-80(2) | 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 Subsection 10(1) | Superannuation Industry (Supervision) Act 1993 Section 19 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: An amount of applicable fund earnings in respect of the lump sum received from the Foreign Fund should be included as assessable 'applicable fund earnings' in your income tax return for the income year in which the transfer is made. As you will no longer have an interest in the Foreign Fund after the transfer, you will be eligible to make an election to have the applicable fund earnings amount treated as assessable income of the Australian Fund. | 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, is assessable under section 305-70 of the 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 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. An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund. | Detailed Reasoning - Meaning of 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. 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 (SISA). In accordance with subsection 10(1) of the SISA, 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. | Detailed Reasoning - Meaning of 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. 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 SISA, a regulated superannuation fund must be 'maintained solely' for the 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 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 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 SISA and the SISR. In this case, it is evident that the Foreign Fund was established outside of Australia and its central management and control was outside of Australia. In addition, the documentation provided indicates that your benefits in the Foreign Fund are only payable upon retirement, invalidity or death. As such, the Foreign Fund is a superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997 | Detailed Reasoning - Applicable fund earnings: 1. You became a resident of Australia for tax purposes several years ago and you intend to transfer your interest in the Foreign Fund. As this will be more than six months after you became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in your assessable income. 2. The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(3) of the ITAA 1997 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). This means you are only assessed on the income earned on your benefits in the Foreign Fund less any contributions you made since becoming 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 amount is the result of a calculation from two other amounts and subsection 960-50(4) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 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. 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 amount vested in the foreign fund just before the day you first became an Australian resident at the exchange rate applicable on the day of receipt of the lump sum. | Detailed Reasoning - Amounts to be used in calculation: You are yet to transfer your benefits from the Foreign Fund. Until that transfer takes place, we are unable to calculate the actual amount to be included as assessable 'applicable fund earnings' in your income tax return for the income year in which the transfer is made. However, we will demonstrate how the applicable fund earnings amount is calculated by using as an example the transfer value of your benefits in the 2014-15 income year. Please note that should the relevant amounts change, the applicable fund earnings will need to be recalculated. The value of your benefits in the Foreign Fund on the day before you became a resident for tax purposes is converted into Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum. From the facts provided, no contributions have been made to the Foreign Fund since you migrated to Australia. The value of your benefit in the Foreign Fund at date the lump sum is paid is 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. You were a resident for the whole period from when you became resident and when the lump sum was paid. 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. | Detailed Reasoning - Calculation of the assessable amount of the payment from the Foreign 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). The result is the applicable fund earnings amount. This amount would be included as assessable 'applicable fund earnings' in your income tax return for the 2014-15 income year if the transfer had taken place in that income year. | Detailed Reasoning - Election: A taxpayer who transfers their overseas superannuation lump sum directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have part of the payment treated as assessable income of the Australian superannuation fund. As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate. To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997. As you will no longer have an interest in the Foreign Fund after the transfer is made, and the other conditions are satisfied, you will be eligible to make the election.