Private ruling: Lump sum from foreign superannuation fund
Published: November 2014
Ruling period: Income year ending 30 June 2015; and | Income year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Can the taxpayer make an election under section 305-80 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the transfers from the overseas pension funds (the Overseas Funds)? | A1: Yes.

Relevant facts and circumstances: Your client (the Taxpayer) is a former overseas resident. In the 200X income year, the Taxpayer became a resident of Australia. The Taxpayer has a foreign pension (the Foreign Pension). The Foreign Pension does not allow for partial transfer to an Australian superannuation fund. Consequently, the Taxpayer intends to transfer the balance in the Foreign Pension to a number of separate overseas pension funds (the Overseas Funds). The Overseas Funds: (i) allow individuals to make their own investment decisions from a range of approved investments; (ii) receive concessional tax treatment on contributions in exchange for limits on accessibility; and (iii) restrict the withdrawal of benefits until the recipient is 55 years of age. The Taxpayer intends to then, transfer the balance in the Overseas Funds to a complying Australian superannuation fund (the Australian Fund). In the relevant income year, the Taxpayer intends to transfer the entire balance of one of the Overseas Funds (the Overseas Fund 1) to the Australian fund. In the subsequent income year, the Taxpayer intends to transfer the entire balance of another of the Overseas Funds (the Overseas Fund 2) to the Australian Fund. The Taxpayer intends to make an election under section 305-80 of the ITAA 1997 in respect of each transfer to the Australian 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 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 Section 305-80 | Income Tax Assessment Act 1997 Subsection 305-80(1) | Income Tax Assessment Act 1997 Subsection 305-80(3) | 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: In accordance with section 305-80 of the ITAA 1997, the Taxpayer may choose to include all or part of their applicable fund earnings in relation to the transfers from the Overseas Funds, as worked out under section 305-75 of the ITAA 1997, in the assessable income of the Australian Fund. The choice under section 305-80 of the ITAA 1997 must be in writing and must comply with any requirements specified in the regulations. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received or transferred more than six months after a person has become an Australian resident, is assessable under section 305-70 of the ITAA 1997. The applicable fund earnings are 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) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 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, section 305-70 of the ITAA 1997 will not have any application. | 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. 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. Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia, would not qualify as an Australian superannuation fund and would therefore, be a foreign superannuation fund. The fact that some of its members may be Australian residents would not necessarily alter this. | Detailed Reasoning - Meaning of 'superannuation fund': 'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the 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. 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 its attendant 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 SISA. It is evident that the Overseas Funds are established outside of Australia. Similarly, their central management and control is outside of Australia. Based on the above, and the fact that the Taxpayer cannot access their benefits from the Overseas Funds other than on attaining 55 years, the Commissioner considers that the Overseas Funds are foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997. Therefore, section 305-70 of the ITAA 1997 applies to determine the applicable fund earnings in relation to the lump sum payments from the Overseas Fund 1 and the Overseas Fund 2. | Detailed Reasoning - Section 305-80 election: A taxpayer transferring their overseas superannuation to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under section 305-80 of the ITAA 1997 to have all or part of the payment treated as assessable income of the Australian superannuation fund. As a result, the amount specified in the election notice will be included in the 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 rate of tax. 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). The election must be in writing, must specify the amount to be covered by the election and must comply with any requirements specified in the Income Tax Assessment Regulations 1997 (subsection 305-80(3) of the ITAA 1997). As noted in the facts of this case, immediately after the transfers from the Overseas Fund 1 and the Overseas Fund 2 are made, the Taxpayer will no longer have an interest in the Overseas Fund 1 and the Overseas Fund 2 as all their benefits in these funds will be transferred to the Australian Fund. Therefore, the Taxpayer will be eligible to make an election under subsection 305-80 of the ITAA 1997 to have all, or part, of their applicable fund earnings in respect of the transfers (if any) treated as assessable income of the Australian Fund. An amount that is covered by an election under section 305-80 of the ITAA 1997 will not be treated as either a concessional contribution or a non-concessional contribution to the Australian Fund. Consequently, this amount will not count towards the Taxpayer's concessional or non-concessional contributions caps for the relevant income year.