Private ruling: Applicable fund earnings
Date of advice: 23 July 2015
Published: July 2015
Ruling period: Income year ending 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is any part of the amount transferred by the taxpayer from the Foreign Fund to an Australian superannuation 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: The Taxpayer migrated to Australia a number of years ago and has been an Australian resident for tax purposes since that date. While living overseas, the Taxpayer became a member of a foreign superannuation fund (the Foreign Fund). The Foreign Fund was established overseas and its central management and control are in a foreign country. The Taxpayer cannot access their benefits in the Foreign Fund other than at retirement. The Taxpayer intends to transfer an amount from the Foreign Fund to an Australian complying superannuation fund (the Australian Fund) during the 20YY-ZZ income year. The Foreign Fund has guaranteed a benefit which would apply if the transfer occurred before a certain date during the 20YY-ZZ income year. The Taxpayer received the guaranteed benefit information from the Foreign Fund during the 20XX-YY income year. The trustee of the Foreign Fund was unable to provide the value that was vested in the Taxpayer on the day before they became a resident. However, the Taxpayer has subsequently agreed to an estimated value. Since becoming an Australian resident, the Taxpayer has not made any contributions to the Foreign Fund. The Taxpayer also does not intend to make any future contributions to the Foreign Fund. The Taxpayer intends to transfer the full amount of their interest in the Foreign Fund to 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 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 All legislative references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision: Summary: A portion of the lump sum payment to be transferred from the Foreign Fund will be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the income year in which the transfer is made. However, as the Taxpayer will no longer have an interest in the Foreign Fund after they make the transfer, they are eligible to elect to have all or part of the applicable fund earnings treated as assessable income of the Australian Fund. | 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. The applicable fund earnings is the amount worked out under either subsection 305-75(2) or 305-75(3). 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. In accordance with subsection 295-95(2), 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 … Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia is not an Australian superannuation fund. Consequently, such a fund would be a foreign superannuation fund as defined in subsection 995-1(1). | 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. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519. 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. 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 ) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. In this case, it is clear that the Foreign Fund was established outside of Australia and that their central management and control are outside of Australia. In addition, the Taxpayer's benefits in the Foreign Fund are only payable upon retirement. As such, the Foreign Fund would meet the definition of a superannuation fund. Therefore, on the basis of the information provided, the Commissioner considers the Foreign Fund to be a foreign superannuation fund for the purposes of section 305-70. | Detailed Reasoning - Applicable fund earnings: The Taxpayer became a resident of Australia for tax purposes a number of years ago and will receive the lump sum payment in respect of their entitlements in the Foreign Fund during the 20YY-ZZ income year. As this would be more than six months after the Taxpayer became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in their assessable income. The 'applicable fund earnings' amount is 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) 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). This means that the Taxpayer is assessed only on the income they earned on the benefits in the Foreign 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 applicable fund earnings amount 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 Foreign Fund vested in the Taxpayer just before the day they 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. | Detailed Reasoning - Amounts to be used in calculation of the assessable amount: The Taxpayer is yet to transfer their benefits from the Foreign Fund. Until that transfer takes place, we are unable to advise the actual figure to be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the income year in which the transfer is made. However, we will demonstrate how the applicable fund earnings are calculated by using as an example the transfer value of the Taxpayer's benefits as the date the guaranteed transfer value was obtained. Please note that should the relevant amounts change then the applicable fund earnings will need to be recalculated. The Taxpayer's total vested amounts in the Foreign Fund on the day before they became an Australian resident are converted into Australian dollars at the exchange rate that applies on the date the payments are received. From the facts provided no contributions have been made to the Foreign Fund since the Taxpayer migrated to Australia. The amount to be received in the 20YY-ZZ income year will be converted into Australian dollars at the exchange rate that applied on the date the payments are received. 'The period' for the purposes of paragraph 305 75(3)(c) commences on the day on which the person first became an Australian resident for tax purposes and ceases on the day the lump sum is paid. In the Taxpayer's case, that period would have been from the date they became an Australian resident to the date they received the payment, provided they were a resident for the whole of that period. There are no previously exempt fund earnings in relation to the lump sum. | Detailed Reasoning - Calculation of the assessable amount of the payment for each Foreign Fund: In accordance with subsection 305-75(3), 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). 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). Consequently, the Taxpayer will include a portion of the lump sum payment transferred from the Foreign Fund to the Australian superannuation fund as assessable 'applicable fund earnings' in their return for the 20YY-ZZ income year. | Detailed Reasoning - Election: A taxpayer who is transferring their overseas superannuation benefits 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) to have all or part of the applicable fund earnings 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 (subsection 305-80(1)). As the Taxpayer will no longer have an interest in the Foreign Fund after the transfer is made, they are eligible to make an election to have all, or part, of this amount treated as assessable income of the Australian Fund.