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

Ruling: Q1: Is any part of the lump sum benefit transferred from a foreign fund to an Australian superannuation fund, assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997? | A1: No.

Relevant facts and circumstances: Your Client migrated to Australia in the 20XX-YY income year and has been a resident of Australia for tax purposes since that date. Your Client held an interest in a foreign pension scheme (Fund A). The rules of Fund A do not allow partial transfers. In the 20AA-BB income year, Your Client transferred the entire value from Fund A to another foreign fund (Fund B). In the 20AA-BB income year, Your Client transferred an amount from Fund B to a complying Australian super fund (Fund C). In early 20BB, Your Client was advised in a Notice of Private Ruling that no part of the payment transferred between Fund A and Fund B was assessable. In the 20CC-DD income year, Your Client transferred the remainder of the balance in Fund B to Fund C. Your Client no longer has an interest in Fund B. There have been no contributions to either Fund A or Fund B since Your Client migrated to Australia.

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 Subsection 305-75(2). | Income Tax Assessment Act 1997 Subsection 305-75(3). | Income Tax Assessment Act 1997 Paragraph 305-75(2)(a). | Income Tax Assessment Act 1997 Paragraph 305-75(2)(b). | Income Tax Assessment Act 1997 Paragraph 305-75(2)(c). | Income Tax Assessment Act 1997 Subsection 305-80(1) | Income Tax Assessment Act 1997 Section 960-50. | 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 Section 19. | Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision: Summary: The applicable fund earnings amount as calculated in accordance with subsection 305-75(2) of the Income Tax Assessment Act 1997 is less than zero. Therefore, the lump sum amount transferred from Fund B to Fund C is not assessable income and is not exempt income. | Detailed Reasoning - Detailed Reasoning: 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 the amount worked out under either subsections 305-75(2) or 305-75(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 becomes an Australian resident after the start of 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. Subsection 295-95(2) of the ITAA 1997 defines Australian superannuation fund as follows: 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 (c) at that time either the fund had no member covered by subsection (3) (an active member ) or at least 50% of: (i) the total market value of the funds assets attributable to superannuation interests held by active members; or (ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members; is attributable to superannuation interests held by active members who are Australian residents. Thus, 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), that is: (a) a fund that: (i) is an indefinitely continuing fund; and (ii) is a provident, benefit, superannuation or retirement fund; or (a) a public sector superannuation scheme; | Detailed Reasoning - 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 Commissioner of Taxation (Cth) (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. Furthermore, 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 '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 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 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. Therefore, in order for the lump sum payment 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. In the present case, Your Client was a member of Fund A. Subsequently, Your Client transferred the benefits from Fund A to Fund B. Both Fund A and Fund B were established outside of Australia, each with its central management and control outside of Australia. Therefore neither Fund A or Fund B are an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997 From the information provided, the benefits in Fund A and Fund B can only be paid on retirement. As the benefits are paid in circumstances solely relating to retirement purposes, both Fund A and Fund B would meet the definition of superannuation fund. Therefore, on the basis of the information provided, the Commissioner considers the benefits transferred on Your Client's behalf are from 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 in the 20XX-YY income year and at that time, Your Client was a member of Fund A. In the 20AA-BB income year, Your Client's entitlements in Fund A were transferred to foreign Fund B. In the 20CC-DD income year, Your Client transferred the balance of their entitlements in Fund B to Fund C. As this payment occurred more than six months after Your Client became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' amount, (if any), in Your Client's assessable income for the 20CC-DD income year. The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. As mentioned earlier, 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(2) of the ITAA 1997 states: If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day ); (ii) the part of the lump sum (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 income tax); (c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6). | 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 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, the 'applicable fund earnings' should be calculated by: • translating the amount of the superannuation lump sum received from the foreign fund to Australian currency at the exchange rate applicable on the day of receipt; and • deducting from this amount, the part of the lump sum that is attributable to amounts transferred into the fund from any other foreign superannuation fund at the exchange rate applicable on the day of receipt of the lump sum. | Detailed Reasoning - Calculation of the assessable amount of the lump sum payment to Fund C: In accordance with subsection 305-75(2) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(2)(a)(i) and (ii) are added. This total is then subtracted from the amount determined under paragraph 305-75(2)(b). To this figure we add amounts determined under paragraph 305-75(2)(c).