Private ruling: Transfer of payment from foreign superannuation fund
Date of advice: 8 June 2016
Published: July 2016
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: For the purposes of section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997), is there an amount of previously exempt fund earnings from a transfer of benefits from an overseas fund to another overseas fund? | A1: Yes.

Relevant facts and circumstances: Your Client migrated to Australia several years ago as a Temporary Resident on a specific visa, which was granted several years ago. Your Client became a Permanent Resident on a specific visa, which was granted several years ago, and was granted Australian citizenship several years ago. The estimated value of your client's interest in an overseas fund (Pension Fund A) on the day before the Residency Date was an amount. During the 20XX-YY income year, Your Client transferred benefits from Pension Fund A to a new overseas fund (Pension Fund B). The transfer represents all of your Client's interest in Pension Fund A. There have been no contributions or pension amalgamations to Pension Fund A since your client migrated to Australia. Funds cannot be accessed from Pension Fund A and Pension Fund B than at retirement in the overseas country. Your Client intends to transfer an amount from Pension Fund B in the overseas country to a self-managed superannuation fund (SMSF) at a future date. Your client is under 60 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 292-85 | Income Tax Assessment Act 1997 subsection 292-90 | 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 305-80 | Income Tax Assessment Act 1997 section 960-50 | 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 | Superannuation Industry (Supervision) Regulations 1994 regulation 5.01 | Superannuation Industry (Supervision) Regulations 1994 regulation 7.04 | Superannuation Industry (Supervision) Regulations 1994 regulation 7.05

Reasons for decision: Summary: There is an amount of previously exempt fund earnings from the transfer of benefits from Pension Fund A in an overseas country to from Pension Fund B in an overseas country for the purposes of section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997), which will be included in the calculation of applicable fund earnings under section 305-75(1)(d) when a lump sum payment is transferred to an Australian superannuation fund at a future date. | 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 paragraph 305-70 of the ITAA 1997 when a lump sum payment is transferred to the Australian superannuation fund at a later date 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. 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. | Detailed Reasoning - 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. | Detailed Reasoning - The meaning of 'superannuation fund': 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 (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. 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. 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 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 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 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 be a provident, benefit, superannuation or retirement fund as discussed above. In this case, Your Client has transferred benefits from one overseas fund to another overseas fund. Your client proposes to transfer the benefits from one of the overseas superannuation funds to a SMSF at a future date. Therefore it must first be determined whether the two overseas funds are foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997. The documentation provided indicates that in respect of Your Client's two overseas pension funds, benefits are only paid on retirement and the pension funds would meet the definition of a superannuation fund. In addition, it is clear the pension funds are 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 two overseas pension funds are foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: Your Client became a resident of Australia for tax purposes several years ago and will receive a lump sum payment in respect of their entitlements in the overseas pension fund more than six months after they became an Australian resident for tax purposes, therefore section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in your client's assessable income. 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 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 income 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 they earned on the benefits in the pension fund 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) states that an amount in a foreign currency is to be translated into Australian dollars (A$). The Commissioner's view on the application of this subsection in relation to section 305-75 of the ITAA 1997 is expressed in ATOID 2015/7 which states the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount vested in the foreign fund just before the day the taxpayer first became an Australian resident, from the amount received from the foreign fund. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum. In this case, Your Client transferred the full proceeds of an amount from Pension Fund A to Pension Fund B during the 20XX-YY income year. Your client became a resident of Australia several years ago. Your client proposes to transfer benefits from Pension Fund B to a SMSF. As the transfer of benefits from the overseas fund to the Australian superannuation fund has not occurred the Commissioner cannot provide a private ruling on whether there will be applicable fund earnings under section 305-70 of the ITAA 1997. However we can calculate the previously exempt fund earnings under paragraph 305-75(3)(d) of the ITAA 1997 as the transfer of benefits between the two foreign superannuation funds was made during the 20XX-YY income year. The previously exempt fund earnings will be included in the calculation of applicable fund earnings under section 307-75 when a lump sum is transferred Pension Fund B to an SMSF at a future date. | Detailed Reasoning - Previously exempt fund earnings: The growth in a foreign superannuation fund is not immediately included in a taxpayer's assessable income if the lump sum transfer was from one foreign superannuation fund to another foreign superannuation fund. Transfers between foreign superannuation funds are excluded by subsection 305-70(4) of the ITAA 1997, which states that: (4) Any part of the lump that is paid into another foreign superannuation fund is not assessable income and is not exempt income. Instead, the amount worked out by the applicable fund earnings calculation will be set aside as future 'previously exempt fund earnings,' for when a lump sum is paid from a foreign superannuation fund to Australia in the future. Subsection 305-75(5) defines previously exempt fund earnings as follows: You have an amount of previously exempt fund earnings in respect of the lump sum if: (a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and (b) the amount is attributable to a payment received from a foreign superannuation fund; and (c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund. Subsection 305-75(6) states: The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section). | Detailed Reasoning - Calculation of previously exempt fund earnings: As the transfer from Pension Fund A to Pension Fund B is a transfer between foreign superannuation funds, the growth in Pension Fund A will be set aside as future 'previously exempt fund earnings' when a transfer of benefits are made from Pension Fund B to an SMSF at a future date. As your client became a member of Pension Fund after they became a resident of Australia, the growth in Pension Fund A will be worked out in accordance with subsection 305-75(3) of the ITAA 1997. 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 value of the amount in Pension Fund A that was vested in Your Client on the day before Your Client became an Australian resident is an amount. The growth is worked out in accordance with subsection 305-75(3) of the ITAA 1997 is shown in the table below. | Detailed Reasoning - A: Value of your client's interest in Pension Scheme on the day before the Residency Date An amount | Detailed Reasoning - B: Part of the lump sum attributable to contributions to X Pension Scheme | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into X Pension Scheme | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) An amount | Detailed Reasoning - E: Amount in X Pension Scheme vested in your client when the lump sum was paid to Y Pension Fund An amount | Detailed Reasoning - E - D: (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) An amount | Detailed Reasoning - G: The proportion of the total days during the period (from the Residency Date to the date of receipt) of which your client was an Australian resident | Detailed Reasoning - H: Previously exempt fund earnings (if any) | Detailed Reasoning - I: F x G + H = Applicable Fund Earnings (as future Previously Exempt Fund Earnings ) (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) An amount Therefore, the future 'previously exempt fund earnings' of the payment transferred from Pension Fund A to Pension Fund B is calculated as an amount. This amount will be included in the calculation of applicable fund earnings under paragraph 305-75(3)(d) when a payment is transferred from Pension Fund B to the SMSF at a future date. | Detailed Reasoning - Your review rights: If the Commissioner declines to make a private ruling, we must give you reasons for the decision. This decision may be reviewable under the Administrative Decisions (Judicial Review) Act 1977 (ADJR). The ADJR provides you with two main rights. 1 You can send a written notice to the Commissioner requiring us to provide a written statement of: • the findings of material questions of fact • the evidence these findings were based upon, and • the reasons for the decisions. 2 You may be able to apply to the relevant Courts of Australia for a review of the decision. | Detailed Reasoning - Review by the relevant Courts: If you decide to apply to the relevant Courts for a review of the decision, we suggest you seek professional advice about how to proceed. In addition, the Court will be able to provide you with some direction and assistance about the process. Any such application must be lodged within 28 days of the day on which the decision was made. Your appeal may involve a number of fees. You may lodge your application for review at the relevant Courts in the State or Territory in which you ordinarily reside, or the State or Territory listed in the address for the Tax Office as shown on your written notice of advice. You can find more information on the relevant Court websites. | Detailed Reasoning - Freedom of information: The Freedom of Information Act 1982 (FOI Act) gives you a legal right to access certain documents relating to this decision held by the Tax Office. Requests for access under this Act must: • be in writing • describe the document you want in enough detail to identify the document • give an address in Australia for reply • include the $30.00 application fee, and • be posted or delivered to the Tax Office. The Tax Office may refuse you access to some documents, or portions of documents, that are subject to exemption provisions. There are rights of review should you disagree with this decision. For further information about access to documents under the FOI Act or to obtain a Freedom of Information request form please refer to the contact numbers listed below. | Detailed Reasoning - Contact numbers: If you need help you can: • phone 13 28 69 , or • visit our website at www.ato.gov.au If you do not speak English and need help from the Tax Office, phone the Translating and Interpreting Service on 13 14 50 . People with a hearing or speech impairment with access to appropriate TTY or modem equipment should phone 13 36 77 .