Private ruling: lump sum payment from a foreign superannuation fund
Published: December 2011
Ruling period: 2011-12 income year
Date scheme commenced: 1 July 2011

Ruling: Q1: Are benefits received from the two overseas pension plans subject to tax in Australia? | A1: Yes | Q2: Are benefits transferred from the two pension plans to an Australian complying superannuation fund subject to tax? | A2: Yes

Relevant facts and circumstances: Your client is over age 60. Your client worked in an overseas country during a period between 1994 and 2002 and has a superannuation balance in two pension plans (pension plan 1 and pension plan 2). You advised pension plan 1 is a defined benefit plan which can provide a lump sum benefit and is entirely funded by employer contributions. Under pension plan 1, access to a pension can be obtained from age 55 and access to a lump sum is only after obtaining the age of 60. Pension plan 2 is a defined contribution plan and operates like a retirement fund where contributions made on an individual's behalf result in allocations to the individual's member account consisting of an employer contribution on a pre-tax basis and an employee portion made on an after tax basis. For pension plan 2, access is only after age 60. Early release of benefits for non-retirement purposes (apart for Disability Pensions) are not permitted under the two pension plans. Your client is eligible to receive lump sum entitlements under pension plan 1 (estimated as foreign currency amount $A) and under pension plan 2 (estimated as foreign currency amount $B). The actual amounts will be known once his applications for the withdrawals under both the pension plans are finalised. Your client intends to withdraw all of his entitlements in each plan as single lump sums and transfer those amounts to his Australian superannuation fund.

Relevant legislative provisions: Subsection 295-95(2) of the Income Tax Assessment Act 1997 | Subsection 295-200(3) of the Income Tax Assessment Act 1997 | Section 305-70 of the Income Tax Assessment Act 1997 | Subsection 305-70(1) of the Income Tax Assessment Act 1997 | Section 305-75 of the Income Tax Assessment Act 1997 | Subsection 305-75(2) of the Income Tax Assessment Act 1997 | Subsection 305-75 (3) of the Income Tax Assessment Act 1997 | Subsection 305-75 (5) of the Income Tax Assessment Act 1997 | Subsection 305-75 (6) of the Income Tax Assessment Act 1997 | Subsection 305-80 of the Income Tax Assessment Act 1997 | Subsection 960-50(1) of the Income Tax Assessment Act 1997 | Subsection 960-50(4) of the Income Tax Assessment Act 1997 | Subsection 960-50(6) of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997 | Income Tax Assessment Regulations 1997 Regulation 960-50.01. Section 10 of the Superannuation Industry (Supervision) Act 1993 | Section19 of the Superannuation Industry (Supervision) Act 1993 | Section 62 of the Superannuation Industry (Supervision) Act 1993

Reasons for decision: Summary: A portion of the lump sum payment from each of the pension plans (pension plan 1 and pension plan 2) will be assessable as 'applicable fund earnings' and need to be included your client's assessable income. Essentially, this amount represents the earnings accrued in each of the pension plans since your client has been an Australian resident. However, if the lump sums are transferred directly from each pension plan into an Australian complying superannuation fund for the benefit of your client, your client can choose to have all or part of the 'applicable fund earnings' included in the assessable income of the Australian fund. This would be subject to him meeting the necessary legislative administrative requirements to make the choice. If he makes this choice then the applicable fund earnings under the choice are not included in his assessable income. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: If a superannuation lump sum payment is received from a foreign superannuation fund more than six months after a person became an Australian resident, a portion may be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)). The applicable fund earnings is the amount worked out under subsection 305-75(3) and 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 subsection 305-70, 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 (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; 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 SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur: o on or after retirement from gainful employment; or o attaining a prescribed age; and o 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 each of the pension plans (pension plan 1 and pension plan 2) to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, each of the pension plans 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. Looking at the two pension plans and the additional information you have provided in relation to the the plans, it is evident the two pension plans are established outside of Australia and the central management and control is outside of Australia. Retirement benefits are payable to members of the pension plans only after attaining the relevant retirement ages. Early release of benefits for non-retirement purposes (apart for Disability Pensions) are not permitted under the pension plans. Therefore, the Commissioner considers each of the pension plans is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 and any transfers from each pension plan to an Australian superannuation fund need to be considered under section 305-70 of the ITAA 1997. Lump sum payments from foreign superannuation funds paid more than 6 months after becoming an Australian resident As discussed earlier, 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 ITAA 1997. This will apply even if the person is age 60 or over at the time of payment. The applicable fund earnings is worked out under subsection 305-75(3) where the person becomes an Australian resident after the start of the period to which the lump sum relates. You confirmed that your client left Australia in 1994 and returned in 2002. Therefore, the amount included as assessable income would be calculated under subsection 305-75(3) as your client became an Australian resident on the relevant date (in 2002) which is 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 (but before you received it) 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 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 calculation effectively means that your client will be assessed only on the income earnings accrued in the each of the relevant pension plan (pension plan 1 and pension plan 2) during the period he was a resident of Australia. That is, your client will only be assessed on the accretion in the relevant pension plan less any contributions (if any) made since he became a resident of Australia. Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the scheme do not form part of the taxable amount when the lump sum 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: o first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and o 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 (item 11 of the table to subsection 960-50(6)); and deducting from this amount the AUD equivalent of the payment vested in the relevant pension plan at the exchange rate applicable just before the residency date (item 11A of the table to subsection 960-50(6)). | Detailed Reasoning - Calculation of Assessable Amount: In your client's case, as the lump sum payment has not yet been made, the calculation will be dependent on the final calculated amount of the lump sum payment and the value of the benefit vested in the relevant pension plan on the day just before your client's residency date. This documentation should be obtained from each of the pension plans. Dependent on the actual amounts calculated when translated into AUD, there may or may not be a portion that is assessable as applicable fund earnings . If there is an assessable amount, then that part of the lump sum payment received by your client is to be included in his income tax return for the 2011-12 income year (or the relevant income year the payment is received) as applicable fund earnings unless the total monies are transferred directly to an Australian superannuation fund and the taxpayer makes a choice for the earnings to be taxed in the fund as outlined below. | Detailed Reasoning - Taxation of transfers from foreign superannuation funds: Generally, the applicable fund earnings (as calculated above) are included in the individual's assessable income. However, where the lump sum transfer represents payment of the individual's entire benefits in the foreign fund and those total benefits are paid directly into an Australian complying superannuation fund, the individual can choose (under section 305-80 of the ITAA 1997) to have all or part of the applicable fund earnings included in the assessable income of the Australian fund. An individual makes this choice by specifying an amount in the choice form (ATO Publication NAT 11724). Where the individual chooses to have all or part of the applicable fund earnings included in the Australian fund's assessable income, that amount is no longer included in the individual's assessable income. Where a payment from a foreign superannuation fund exceeds the 'amount vested' in the member at the time of transfer, that excess is assessable income to the Australian fund pursuant to subsection 295-200(1) of the ITAA 1997. The 'amounts vested' in the member are amounts that the member is legally entitled to on leaving the foreign superannuation fund. The part of the payment not covered by the choice form and therefore not included in the assessable income of the Australian fund, in most cases, will be included in the tax free component of the superannuation interest when eventually paid from the Australian fund. In most cases, the amount covered by the choice form that is included in the assessable income of the Australian fund will be included in the taxable component of the member's superannuation interest when eventually paid from the Australian fund. If a person is age 60 or over when receiving a superannuation benefit from an Australian complying fund, the benefit is not assessable income and is not exempt income unless the benefit includes an element untaxed in the fund.

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