Private ruling: Lump sum payment from a foreign fund.
Date of advice: 10 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: A1: 1. Yes. 2. Yes. 3. Yes.

Relevant facts and circumstances: Your Client, prior to becoming a resident of Australia for income tax purposes, held an interest in Scheme 1 and Scheme 2. Scheme 1 and Scheme 2 are retirement funds established and managed overseas. Benefits in Scheme 1 and Scheme 2 are only payable after attaining age 55, retirement age or leaving that country. Your Client became a resident of Australia for income tax purposes in 2013. A lump sum payment from Scheme 1 was deposited into Your Client’s foreign bank account in late 2016. An amount was deducted as tax from the lump sum payment in that overseas country. Your Client no longer holds an interest in Scheme 1. There have been no transfers into Scheme 1 from other foreign pension schemes since Your Client became a resident of Australia. Your Client made some contributions into Scheme 2 since becoming an Australian resident. A lump sum payment from Scheme 2 was deposited into Your Client’s foreign bank account in late 2016. An amount was deducted as tax from the lump sum payment in that overseas country. Your Client no longer holds an interest in Scheme 2. There have been no transfers into Scheme 2 from other foreign pension schemes since Your Client became a resident of 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 Section 307-15 | Income Tax Assessment Act 1997 Section 770-10 | Income Tax Assessment Act 1997 Section 770-15 | Income Tax Assessment Act 1997 Section 770-75 | Income Tax Assessment Act 1997 Section 770-130 | 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 960-50(6) | 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 All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision: Summary: A portion of the lump sum payments received by Your Client from Scheme 1 and Scheme 2 will be included as assessable ‘applicable fund earnings’ in their income tax return for the 2016-17 income year. A credit for foreign tax paid on the foreign lump sums is available to Your Client. The tax offset is limited to the amount of Australian tax otherwise payable. | Detailed Reasoning - Applicable fund earnings: 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. The applicable fund earnings amount is subject to tax at the person’s marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income. The applicable fund earnings is worked out under either subsection 305-75(2) or 305-75(3). 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. The overall effect of section 305-75 is that Your Client will be assessed on the sum of: ● the total growth they earned on their benefits in a foreign superannuation fund during the period between the start day and the date when the lump sum is paid; and ● any previously exempt fund earnings. An amount is only assessable under section 305-70 if the entity making the payment is a foreign superannuation fund. | Detailed Reasoning - Foreign superannuation fund: A foreign superannuation fund is defined in subsection 995-1(1) 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), 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. | Detailed Reasoning - Superannuation fund: ‘Superannuation fund’ is defined in subsection 995-1(1) 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’. 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 that 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), consideration must also turn to the requirements set out in subsection 295-95(2). 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, information provided indicates Your Client's benefits in Scheme 1 and Scheme 2 are only payable upon retirement, or attaining a prescribed age. Accordingly, Scheme 1 and Scheme 2 meet the definition of superannuation fund. In addition, it is clear that Scheme 1 and Scheme 2 are established outside of Australia with their central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payments received by Your Client from the Schemes were from foreign superannuation funds as defined in subsection 995-1(1). | Detailed Reasoning - Applicable fund earnings: Your Client became a resident of Australia in 2013 and received lump sum payments in respect of their entitlements in Scheme 1 and Scheme 2 in 2016. As this was more than six months after Your Client became an Australian resident, section 305-70 applies to include any ‘applicable fund earnings’ in their assessable income. [Please note, in accordance with section 307-15, the date Your Client received the lump sum payments was the date they were paid into their foreign bank account]. As Your Client became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings are worked out under subsection 305-75(3). Subsection 305-75(3) 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, Your Client is assessed only on the income earned (the accretion) in respect of the foreign superannuation fund less any contributions 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) 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) 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. 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 in considering Item 11A of the table in subsection 960-50(6) of the ITAA 1997, determined that the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsection 305-75(3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. Therefore, for the purposes of section 305-70, the ‘applicable fund earnings’ amount in respect of the lump sum received from a fund should be calculated by deducting the Australian dollar equivalent of the amount vested in the fund just before the day the taxpayer first became an Australian resident, from the amount received by the taxpayer from the fund. Both amounts should be translated using the exchange rate applicable on the day of receipt of the lump sum. | Detailed Reasoning - Calculation of the assessable amount of the lump sum payments from Scheme 1 and Scheme 2: The amount of applicable fund earnings is calculated in accordance with subsection 305-75(3) of the ITAA 1997. In this case, any assessable applicable fund earnings is subject to Your Client’s marginal tax rate. | Detailed Reasoning - Foreign income tax offset: Section-770-10 of the ITAA 1997 provides that a foreign income tax offset can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains (section 770-15 of the ITAA 1997). The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign tax has been withheld from the income at its source (section 770-130 of the ITAA 1997). If a taxpayer is claiming a foreign income tax offset of more than $1,000, they will need to work out their foreign income tax offset limit. This may result in the tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to the taxpayer (section 770-75 of the ITAA 1997). If claiming an offset of $1,000 or less, the taxpayer does not need to work out a limit and only needs to record the actual amount of foreign income tax paid. In your case, Your Client is entitled to a tax offset for foreign income tax paid overseas in respect of the lump sum payments under section 770-10. However, the offset is limited to the amount of Australian tax otherwise payable. Any excess foreign tax is not refundable.

Question.1: Is any part of a lump sum payment received from Scheme 1 assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Question.2: Is any part of a lump sum payment received from Scheme 2 assessable as applicable fund earnings under section 305-75 of the ITAA 1997? | Question.3: Is Your Client entitled to claim a credit for the tax paid in the overseas country in respect of the lump sum payments?