Private ruling: Lump sum transfers from foreign superannuation funds
Published: April 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Is any part of the amounts transferred from the taxpayer's overseas pension schemes 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 arrived in Australia from an overseas country during the 2007-08 income year and has been an Australian resident for tax purposes since the date of arrival (the Residency Date). The taxpayer held an interest in two separate overseas pension schemes (Fund A and Fund B), which are pension schemes established and controlled in the overseas country. The taxpayer was unable to provide the total value of their interest in either Fund A or Fund B on the day before the Residency Date. The taxpayer has agreed that the Australian Taxation Office estimate the value of their interest in Fund A and their interest in Fund B on the day before the Residency Date is reasonable. The taxpayer cannot access their benefits in either Fund A or Fund B other than at retirement. There have been no contributions or pension amalgamations to either Fund A or Fund B since the taxpayer migrated to Australia. During the 2013-14 income year, an amount was transferred from Fund A into the taxpayer's superannuation account held in a complying superannuation fund in Australia (the Australian Fund). During the 2014-15 income year, an amount was transferred from Fund B into the taxpayer's superannuation account held in the Australian Fund. The taxpayer no longer has an interest in either Fund A or Fund B.

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

Reasons for decision: Summary: A portion of the lump sum payment transferred from Fund A to the Australian Fund should be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2013-14 income year. A portion of the lump sum payment transferred from Fund B to the Australian Fund should be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2014-15 income year. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Section 305-70 of the ITAA 1997 applies in relation to superannuation lump sum benefits received more than six months after Australian residency from: • a foreign superannuation fund; or • a scheme for the payment of superannuation-like benefits that is not and never has been an Australian superannuation fund or a foreign superannuation fund; and was not established in Australia, and is not centrally managed or controlled in Australia. ' Foreign superannuation fund ' is defined in subsection 995-1(1) as a superannuation fund that is not an Australian superannuation fund. Relevantly, 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 or scheme 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. In accordance with subsection 995-1(1) of the ITAA 1997, the term 'superannuation fund' has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA) which states: S uperannuation 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 what it means to be a 'provident, benefit, superannuation or retirement fund' in Scott v. Federal Commissioner of Taxation (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 and in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519. It was held that such a fund meant: • Money (or investments) set aside and invested, with the surplus income being capitalised; • For 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.' 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 and other death benefits and other approved benefits. Notwithstanding that the SISA does not apply to foreign superannuation funds, 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 evident that both Fund A and Fund B were established outside of Australia and their central management and control is outside of Australia. Based on the above, and the fact that the information provided indicates that the taxpayer's benefits in Fund A and Fund B are only payable upon retirement, the Commissioner considers that both Fund A and Fund B are foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997. Therefore, in accordance with section 305-70 of the ITAA 1997, the taxpayer is required to include in the assessable income so much of the lump sums as equals their applicable fund earnings. | Detailed Reasoning - Applicable fund earnings - Fund A and Fund B: The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As the taxpayers became an Australian resident after the start of the period to which the lump sums relate, the applicable fund earnings are worked out in accordance with subsection 305-75(3) of the ITAA 1997 which 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 effect of section 305-75 of the ITAA 1997 is that the taxpayer is assessed only on the income they earned on their benefits in Fund A and Fund B less any contributions 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) 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) 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. In ATO Interpretative Decision ATO ID 2015/7, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer just before they became a resident of Australia. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of the lump sums received from Fund A and Fund B should be calculated by deducting the Australian dollar equivalent of the amount vested in funds just before the day the taxpayer first became an Australian resident, from the amount received by the taxpayer from the funds. Both amounts should be translated using the exchange rate applicable on the day of receipt. | Detailed Reasoning - Amounts to be used in calculations - Fund A: The calculation of the applicable fund earnings for the lump sum received from Fund A is shown in the table below with reference to the facts of the case. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Agreed estimated value of the taxpayer's interest in Fund A on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to Fund A | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into Fund A | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in Fund A vested in the taxpayer when the lump sum was paid | Detailed Reasoning - E - D: (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) | Detailed Reasoning - G: The proportion of the total days during the period (from the Residency Date to the date the lump sum was paid) of which the taxpayer was an Australian resident | Detailed Reasoning - H: Previously exempt fund earnings (if any) | Detailed Reasoning - I: F x G + H = Applicable Fund Earnings (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - Y - X: The result of this calculation above is the portion of the lump sum payment transferred from Fund A to the Australian Fund which must be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2013-14 income year. | Detailed Reasoning - Amounts to be used in calculations - Fund B: The calculation of the applicable fund earnings for the lump sum received from Fund B is shown in the table below with reference to the facts of the case. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Agreed estimated value of the taxpayer's interest in Fund B on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to Fund B | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into Fund B | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in Fund B vested in the taxpayer when the lump sum was paid | Detailed Reasoning - E - D: (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) | Detailed Reasoning - G: The proportion of the total days during the period (from the Residency Date to the date the lump sum was paid) of which the taxpayer was an Australian resident | Detailed Reasoning - H: Previously exempt fund earnings (if any) | Detailed Reasoning - I: F x G + H = Applicable Fund Earnings (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - Election: According to section 305-80 of the ITAA 1997, a taxpayer who is transferring their overseas superannuation benefits directly to an Australian complying superannuation fund is able to elect to have the Australian superannuation fund pay the tax on the applicable fund earnings if the taxpayer no longer has an interest in the overseas fund immediately after the payment As the taxpayer no longer has an interest in either Fund A or Fund B, they are eligible to make the election in relation to both the lump sum transfers from Fund A and the lump sum transfer from Fund B. If an election is made, the elected amount will be assessable to the superannuation fund and subject to tax at 15% rather than being assessable to the taxpayer and subject to tax at the taxpayer's marginal tax rate.