Private ruling: Applicable fund earnings
Published: July 2013
Ruling period: 2012-13 income year
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the lump sum paid from a foreign pension scheme to you, 'applicable fund earnings' under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is any part of the monthly pension received from the foreign pension scheme assessable income under the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You became a resident of Australia for tax purposes. You held an interest in a foreign pension fund (the Fund). There have been no contributions to the Fund since you migrated to Australia. An amount was paid from the Fund to you in the relevant income year. You are also currently in receipt of a monthly pension from the Fund.

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 306-70 | 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) | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1936 Section 27H | 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' in respect of the lump sum payment you received from the Fund is calculated as $X. Consequently, this amount is to be included in your assessable income for the relevant income year. With respect to the monthly pension you receive from the Fund, residents of Australia, for income tax purposes, are taxed on their worldwide income. The tax treaty between Australia and the foreign country states that a pension paid to a resident of Australia is taxable only in Australia. | Detailed Reasoning - 1. 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. In this case, the lump sum benefits were transferred from the Fund, a fund established in the foreign country, which satisfies the definition of a foreign superannuation fund. | 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 there from 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: · 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. Information available indicates benefits from the Fund are only payable upon retirement, incapacity and death and the Fund would therefore 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 from the Fund was from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: You became a resident of Australia a while ago and received a lump sum payment from the Fund. As this was more than six months after you became an Australian resident, section 305-70 applies to include any 'applicable fund earnings' in your 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, you are assessed only on the income earned (the accretion) in respect of the foreign pension fund less any contributions you have made since becoming a resident of Australia. 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 (A$). For the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by: · converting the lump sum payment received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table to subsection 960-50(6)) and; · deducting from this amount the Australian dollar equivalent of the payment vested in the overseas superannuation fund at the exchange rate applicable on the day immediately before the residency date (item 11A of the table to subsection 960-50(6)). | Detailed Reasoning - Amounts to be used in calculation: The value of the benefit in the Fund on the date of residency is converted into Australian dollars at the exchange rate that applied on the day just before you became an Australian resident. This amount on conversion is A$A. From the facts provided no contributions have been made to the foreign fund since you became a resident of Australia. In the relevant income year, some of your benefits in the Fund were paid out to you in the form of a lump sum. Therefore this is the amount vested in you when the lump sum was paid. This amount is converted into Australian dollars at the exchange rate that applied on that day, which on conversion is A$B . 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. You were 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. Applying subsection 305-75(3) of the ITAA 1997 to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows: 305-75(3)(a)(i) $A 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) $B 305-75(3)(c) 1 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the lump sum payment from the Fund: 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: $A+ nil + nil = $A This total is then subtracted from the amount determined under paragraph 305-75(3)(b): $B less $A 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 Therefore, $X is the amount of 'applicable fund earnings' in relation to the lump sum from the foreign fund that is assessable income. | Detailed Reasoning - 2. Pension paid from a foreign superannuation fund: Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of an Australian resident includes their ordinary and statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Superannuation pensions are included in assessable income under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936). In determining the liability of an Australian resident to Australian tax on foreign sourced income, it is necessary to consider not only the Australian tax laws but also any applicable tax treaty. Tax treaties are given the force of law domestically by the International Tax Agreements Act 1953 (the Agreements Act). The Agreements Act states that where there are inconsistencies with an Act imposing Australian tax, the Agreements Act will prevail (except in relation to tax avoidance schemes). Australia has signed a tax treaty with the foreign country, which is called the convention between the Government of Australia and the Government of the foreign country for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains. Article 17(1) of the Convention provides that pensions (including government pensions) and annuities paid to a resident of Australia shall be taxable only in Australia. Accordingly, as you are a resident of Australia for tax purposes, the pension that you receive from the foreign country is required to be included in your assessable income. | Detailed Reasoning - Conclusion:: The applicable fund earnings relating to the lump sum payment from the Fund is $X. This amount is to be included in your assessable income for the relevant income year. The monthly pension you receive from the Fund is also assessable income and the total amount received for the relevant income year is to be included in your assessable income for the relevant income year.