Private ruling: Lump sum payment from a foreign superannuation fund
Published: March 2015
Ruling period: Income year ended 30 June 2015.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Is any part of the benefit transferred from an overseas pension 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 on a certain day in the 2007-2008 income year (the Residency Date). The Taxpayer held an interest in a foreign pension scheme (the Pension Scheme) which is a pension scheme established and controlled in an overseas country. The Taxpayer provided the value of the Taxpayer's benefits in the Pension Scheme as at the day before becoming a resident. The Taxpayer's benefits in the Pension Scheme could not be accessed other than at retirement. There have been no contributions to the Pension Scheme since the Taxpayer migrated to Australia. In the 2013-14 income year, the Taxpayer's benefits in the Pension Scheme were transferred to a complying superannuation fund in Australia (the Payment Date). The Taxpayer no longer has any interest in the foreign pension scheme.

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 subsection 305-70(1) | 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 subsection 305-75(5) | Income Tax Assessment Act 1997 subsection 305-75(6) | Income Tax Assessment Act 1997 subsection 305-80(1) | Income Tax Assessment Act 1997 subsection 305-80(2) | 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: A portion of the lump sum payment transferred from the Pension Scheme must be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the 2014-15 income year. As the Taxpayer no longer has an interest in the Pension Scheme, the Taxpayer is eligible to make an election to have the applicable fund earnings treated as assessable income of the Taxpayer's Australian superannuation fund. | 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 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. An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund . | Detailed Reasoning - Meaning of 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 (SISA). In accordance with subsection 10(1) of the SISA, 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. | Detailed Reasoning - Meaning of 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 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. 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 (SISR)) 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 and the SISR. 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 turn to 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 this case, the documentation provided indicates the Taxpayer's benefits in the Pension Scheme are only payable upon retirement and the fund would meet the definition of a superannuation fund. In addition, it is clear that the Pension Scheme which made the lump sum payment to the Taxpayer was 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 received was from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: The Taxpayer became a resident of Australia for tax purposes on the Residency Date and received the lump sum payment in respect of his/her entitlement in the Pension Scheme on the Payment Date. As this was more than six months after she became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in her 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). This means the Taxpayer is only assessed on the income earned on the Taxpayer's benefits in the Pension Scheme less any contributions the Taxpayer made since becoming 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 (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 received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars; and • deducting from this amount, the amount vested in the foreign fund just before the day your client first became an Australian resident at the exchange rate applicable on the day of receipt of the lump sum. | Detailed Reasoning - Amounts to be used in calculation: The value of the Taxpayer's benefits in the Pension Scheme on the day before becoming a resident for tax purposes is converted into Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum. From the facts provided no contributions have been made to the Pension Scheme since the Taxpayer migrated to Australia. During the 2013-14 income year, the Taxpayer's benefits in the Pension Scheme were paid in the form of a one-off lump which was transferred directly into a complying Australian superannuation fund. Therefore this is the amount vested in the Taxpayer when the lump sum was paid. The Taxpayer provided documentation to show the amount received in a foreign currency and the amount converted into Australian dollars. '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. The Taxpayer was a resident for the whole of this 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. There are no previously exempt fund earnings in relation to the lump sum. | Detailed Reasoning - Calculation of the assessable amount of the payment from the foreign Pension Scheme: 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. 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). As the result of this calculation is positive, a portion of the lump sum payment transferred from the Pension Fund to the Australian Fund will be included as assessable 'applicable fund earnings' in the Taxpayer's income tax return for the 2014-15 income year. | Detailed Reasoning - Election: A taxpayer who is transferring their overseas superannuation 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) of the ITAA 1997 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 tax 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) of the ITAA 1997). As the Taxpayer no longer has an interest in the foreign Pension Scheme the Taxpayer is eligible to make the election.