Private ruling: Lump sum payment from foreign surplus apportionment schemes
Published: March 2013
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the surplus payment made from an overseas pension plan assessable as applicable fund earnings? Advice/Answers: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2). | Income Tax Assessment Act 1997 Subsection 6-10(4). | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 305-55. | Income Tax Assessment Act 1997 Section 305-60. | Income Tax Assessment Act 1997 Section 305-70. | 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 Section 307-5. | Income Tax Assessment Act 1997 Section 307-65. | Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Subsection 960-50. | Income Tax Assessment Act 1997 Subsection 995-1(1). | Superannuation Industry (Supervision) Act 1993 Section 10. | Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision: Summary: The applicable fund earnings calculated are to be declared in your client's income tax return for the relevant year. | Detailed Reasoning - Assessable income of an Australian resident: Subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a resident taxpayer includes ordinary or statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 10-5 of the ITAA 1997 lists the provisions in respect of statutory income. Included in this list is section 305-70 which includes as assessable income the applicable fund earnings in relation to lump sum payments from foreign superannuation funds received more that six months after a taxpayer has become an Australian resident. Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation benefits from foreign superannuation funds. Subsection 305-55(1) specifies that the Subdivision applies if: (a) you receive a superannuation lump sum from a foreign superannuation fund; and (b) the fund is an entity mentioned in item 4 of the table in subsection 295-490(1) (which deals with deductions for superannuation entities). | Detailed Reasoning - Superannuation lump sum: Section 307-65 defines a superannuation lump sum as a 'superannuation benefit' that is not a 'superannuation income stream benefit'. Under section 307-5, a superannuation benefit includes 'a payment to you from a superannuation fund because you are a fund member'. As your client is an Australian resident and he received a lump sum payment from a foreign fund, it is relevant to determine whether section 305-70 of the ITAA 1997 applies to him. | 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 section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The remainder of the lump sum payment is not assessable income and is not exempt income. The applicable fund earnings is 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 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. 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), which requires that the fund is a provident, benefit, superannuation or retirement fund. | Detailed Reasoning - 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'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 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 also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. 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. The documentation and information provided in relation to the overseas fund indicate benefits are only paid on retirement and the Fund would meet the definition of superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with its central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment your client received is from a foreign superannuation fund 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 more than thirty years ago and he received the lump sum payment in the 2011-12. income year. As the payment was received more than six months after your client became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your client's assessable income. The 'applicable fund earnings' are 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) 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). In short, your client is assessed only on the income earned (the accretion) in respect of the bonus payment less any contributions your client made since he became 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 (AUD). The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) requires that when applying section 960-50 to amounts that are elements in the calculation of another amount, one needs 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 lump sum payment received from the relevant pension plan at the exchange rate applicable on the day of receipt to AUD; and · deducting from this amount the AUD equivalent of the payment vested in the relevant pension plan at the exchange rate applicable on the day just before the residency date. | Detailed Reasoning - 305-75(3)(a)(i):: The value of the benefit in the foreign pension fund (the Fund) on the day before your client became a resident of Australia was nil in relation to the bonus payment. This is because the lump sum bonus payment represents the arrear payments of your client's statutory minimum pension increase which applied at a date much later than the day before your client became a resident of Australia in terms of the surplus apportionment scheme. | Detailed Reasoning - 305-75(3)(a)(ii):: From the facts provided contributions made by your client's Australian employer to the Fund since your client migrated to Australia have been taken into account in the payment of the pension currently being paid by the Fund and therefore do not form part of the arrears of pension. Therefore the value of contributions made after your client became a resident of Australia for the purpose of this calculation is nil. | Detailed Reasoning - 305-75(3)(a)(iii):: There have been no transfers into your client's account in the Fund from other foreign pension schemes by your client since becoming a resident of Australia. | Detailed Reasoning - 305-75(3)(b):: Your client's bonus payment was paid out to your client from overseas in the form of a one-off lump sum which was transferred to your client. Therefore this is the amount vested in your client when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on the date of transfer to Australia. Based on the information provided your client received A$X , that is, the amount received in foreign currency was converted into Australian dollars on the date of receipt. | Detailed Reasoning - 305-75(3)(c):: '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. 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 calculation is 1. | Detailed Reasoning - 305-75(3)(d):: There are no previously exempt fund earnings in relation to the lump sum. | Detailed Reasoning - Summary of amounts to be used in the calculation: Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings are as follows: 305-75(3)(a)(i) Nil 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) $X 305-75(3)(c) 1 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from Pension Account 1: 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: Nil + nil + nil = Nil This total is then subtracted from the amount determined under paragraph 305-75(3)(b): $X less Nil is $X This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c): $X x 1 = $X To this figure we add the amounts determined under paragraph 305-75(3)(d): $X + nil = $X. Consequently, the lump sum payment of $X will be included as assessable 'applicable fund earnings' in your client's tax return for the 2011-12 income year.

Relevant facts: Your client is over 60 years of age. | Your client was employed in a foreign country by a company's subsidiary and was a member of the foreign company pension fund (the Fund), a defined benefit fund. | As part of their job your client visited and worked in Australia over a period of time. | Your client became a permanent resident of Australia more than thirty years ago and was employed by the Australian company subsidiary (the employer) and remained a member of the Fund. | The employer made contributions to the Fund after your client became a resident of Australia. | On retirement your client commenced receiving a pension from the Fund. | You have advised that the employer contributions made after your client became a resident of Australia have been taken into account in the pension being paid to your client. | A class ruling (CR) was issued by the foreign country's revenue service. This ruling is in relation to the distribution of a pension fund surplus to former members, pensioners and/or their beneficiaries. | Your client was advised by the Fund that they would receive a lump sum representing the arrear payments of his statutory minimum pension that applied from early 2000 in terms of the surplus apportionment scheme. | Your client's bank overseas has provided a statement advising that your client was paid the bonus payment and a back payment. | You have advised the amounts your client received in Australian dollars consisting of a back payment and a bonus payment in the 2011-12 income year. The bonus amount is the subject of the ruling. | No payments from any other foreign superannuation funds were made to the Fund after your client became a resident of Australia. | The Fund did not allow for early release of benefits for purposes other than retirement.