Private ruling: Lump sum payment from a foreign superannuation fund
Published: February 2012
Ruling period: 1 July 2010 to 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the payment from an overseas superannuation fund exempt from tax under section 305-65 of the Income Tax Assessment Act 1997 ? Advice/Answers: No. However, the applicable fund earnings are nil.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-55. | Income Tax Assessment Act 1997 Section 305-65. | Income Tax Assessment Act 1997 Section 305-70. | Income Tax Assessment Act 1997 Section 305-75. | Income Tax Assessment Act 1997 Subsection 305-75(1). | Income Tax Assessment Act 1997 Subsection 305-75(2). | Income Tax Assessment Act 1997 Paragraph 305-75(2)(a). | Income Tax Assessment Act 1997 Paragraph 305-75(2)(b). | Income Tax Assessment Act 1997 Paragraph 305-75(2)(c). | Income Tax Assessment Act 1997 Subsection 305-75(5). | Income Tax Assessment Act 1997 Subsection 305-75(6). | Income Tax Assessment Act 1997 Section 307-65. | Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Subsection 960-50. | Income Tax Assessment Act 1997 Subsection 995-1(1). | Superannuation Industry (Supervision) Act 1993 Section 10. | Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision: Summary: The lump sum payment received by your client from a foreign superannuation fund within 6 months of her termination of employment in the foreign country is not tax free as it was exempt from tax in the foreign country. A portion of the lump sum payment from the foreign fund is assessable as 'applicable fund earnings'. However, your client's applicable fund earnings are nil. | Detailed Reasoning - Detailed reasoning: In relation to a termination of employment in a foreign country and receipt of a superannuation lump sum payment, section 305-65(1) of the Income Tax Assessment Act 1997 states the following: A superannuation lump sum you receive is not assessable income and is not exempt income if: (a) you receive it in consequence of: (i) the termination of your employment as an employee, or as the holder of an office, in a foreign country; or (ii) the termination of your engagement on qualifying service on an approved project (within the meaning of section 23AF of the Income Tax Assessment Act 1936), in relation to a foreign country; and (b) it relates only to the period of that employment, holding of office, or engagement; and (c) you were an Australian resident during the period of the employment, holding of office or engagement; and (d) you receive the lump sum within 6 months after the termination; and (e) the lump sum is not exempt from taxation under the law of the foreign country; and (f) for a period of employment or holding an office - your foreign earnings from the employment or office are exempt from income tax under section 23AG of the Income Tax Assessment Act 1936; and (g) for a period of engagement on qualifying service on an approved project - your eligible foreign remuneration from the service is exempt from income tax under section 23AF of that Act. For a payment from a foreign superannuation fund to be tax free all of the conditions in subsection 305-65(1) of the ITAA 1997 must be satisfied. We will deal by them one by one. The payment is received as a consequence of the termination of your client's employment in the foreign country. Therefore paragraph (a) is satisfied. The payment relates to your client's period of employment in the foreign country as the retirement savings plan, was set up for employees of her employer. Therefore paragraph (b) is satisfied. Your client was a resident of Australia during her period of employment in the foreign country so paragraph (c) is satisfied. Your client's employment contract was terminated and she received a lump sum payment from the foreign superannuation fund within 6 months of her termination of employment in the foreign country. Therefore paragraph (d) is satisfied. The payment was not exempt from tax in the foreign country as stated in the rules of the foreign superannuation fund. Therefore paragraph (e) has not been satisfied. As one of the conditions is not satisfied we do not need to consider the remaining conditions. Consequently section 305-65 has not been satisfied. If section 305-65 of the ITAA 1997 is not satisfied, section 305-70 of the ITAA 1997 has to be considered. Subsection 305-70(1) of the ITAA 1997 states that section 305-70 applies to a superannuation lump sum from a foreign superannuation fund if the recipient is a resident when the lump sum is received and sections 305-60 and 305-65 of the ITAA 1997 do not apply. As section 305-65 does not apply to your client section 305-70 will apply. Under subsection 305-70(2) applicable fund earnings calculated under section 305-75 are to be included in assessable income. As your client was a resident at all times during the period to which the lump sum relates the applicable fund earnings are calculated under subsection 305-75(2) of the ITAA 1997. | 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 will be 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) applies where the person was 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 of the ITAA 1997 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 fund's 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; | 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 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: § 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 each the lump sum payment from the foreign 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. 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. In the present case it is evident that the retirement savings plan (the foreign fund) which is a retirement savings plan established overseas, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Documentation from the foreign fund shows that it is set up for retirement purposes. Therefore, the foreign fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: Your client was a resident of Australia for tax purposes and she received the lump sum payment from the foreign fund during the 2010-11 income year. Section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in your client's assessable income in her 2010-11 income tax return. The 'applicable fund earnings' are worked out under section 305-75. As mentioned earlier, subsection 305-75(2) applies where the person was a resident at all times during the period to which the lump sum relates. Subsection 305-75(2) of the ITAA 1997 states: If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day); (ii) the part of the lump sum (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 income tax); (c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6). | 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: § 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 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; and § deducting from this amount the AUD equivalent of the payment vested in the relevant pension plan. | Detailed Reasoning - Amounts to be used in calculation: The following paragraphs show how the 'applicable fund earnings' are calculated. We will call the contributions made for your client or in respect of your client after the date she became a member of the foreign fund AU $X . Each contribution was converted at the applicable exchange rate for the date of each contribution. Amounts transferred into the foreign fund from any other foreign superannuation fund during the period are nil. In the 2010-11 income year the policy was paid out to your client in the form of a once-off as a lump sum. Therefore this is the amount vested in your client when the lump sum was paid. This was converted into Australian dollars when paid to your client by the foreign fund. We will call the amount paid AU $Y (cents ignored). There are no previously exempt fund earnings in relation to the lump sum. Therefore, applying subsection 305-75(2) to your client's circumstances, the amounts to be used in calculating the applicable fund earnings are as follows: 305-75(2)(a)(i) $X 305-75(2)(a)(ii) Nil 305-75(2)(b) $Y 305-75(2)(c) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from foreign superannuation fund: In accordance with 305-75 (2) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(2)(a)(i)and (ii) are added. $X + nil = $X. This total is then subtracted from the amount determined under paragraph 305-75(2)(b), $Y. $Y less $X = $(Z). Previously exempt fund earnings are added to the above result under paragraph 305-75(2)(c). $(Z) + nil = $(Z). As the result is a negative value the applicable fund earnings are nil. Therefore no amount is to be included in your client's income tax return for the 2010-11 income year as 'applicable fund earnings'.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: Your client was employed in a foreign country (the foreign country) and was a resident of Australia for tax purposes while employed there. | Your client became a member of a foreign fund (the foreign fund). | While employed superannuation contributions were paid into the foreign fund in relation to your client's foreign employment. | Your client received contributions paid into the foreign fund. Each contribution was converted to Australian dollars at the time of the contribution. | Your client's employment contract was terminated and your client returned to Australia. | In the 2010-11 income year your client's entire balance in the foreign fund was transferred into your client's Australian bank account. | In accordance with documentation from the foreign fund the contributions have been exempt from tax in the foreign country.