Private ruling: Lump sum payment from a foreign superannuation fund
Date of advice: 3 July 2015
Published: July 2015
Ruling period: 2014-15 income year
Date scheme commenced: 1 July 2014

Ruling: Q1: Is any part of the benefits transferred from your client's pension scheme in a foreign country 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: Your client is an Australian citizen by birth who has previously lived in an overseas country for two separate periods of time. Your client first arrived in the overseas country several years ago and returned to Australia a few years later. Your client then travelled back to the overseas country before returning permanently to Australia prior to the 2014-15 income year. Your client is considered to be an Australian resident for taxation purposes on the last date they return to Australia prior to the 2014-15 income year. Your client held an interest in an overseas pension fund (Pension Fund), which commenced prior to the 2014-15 income year, during a period where they were not considered to be an Australian resident for taxation purposes. The agreed value of your client's interest in the Pension Fund on the day before your client became a resident of Australia was an amount. During the 2014-15 income year, your client received a lump sum payment from the Pension Fund. The payment from the Pension Fund was transferred to a complying Australian superannuation fund. The daily exchange rate on the day your client received a lump sum payment from the Pension Fund was published on the ATO website. The transferred lump sum represented all of your client's interest in the Pension Fund. There have been no contributions or pension amalgamations to the Pension Fund since your client migrated to Australia. Funds cannot be accessed from the Pension Fund other than at retirement in the overseas country.

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 305-80 | Income Tax Assessment Act 1997 section 960-50 | 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: The 'applicable fund earnings' in respect of the lump sum payment paid from a pension scheme in the overseas country (Pension Fund) is calculated as an amount. Consequently an amount of the lump sum payment from the Pension Fund will be included in your client's assessable income in the 2014-15 income year. Your client can elect to have all or part of the assessable 'applicable fund earnings' from the Pension Fund treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, your client no longer had an interest in the foreign 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. 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. Subsection 295-95(2) of the ITAA 1997 defines an 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. 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 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 be a provident, benefit, superannuation or retirement fund as discussed above. The documentation provided indicates that in respect of your client's Pension Fund, benefits are only paid on retirement and the Pension Fund would meet the definition of a superannuation fund. In addition, it is clear the payer of the lump sum payment is 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 payment your client received is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: Your client became a resident of Australia for tax purposes prior to the 2014-15 income year and received the lump sum payment in respect of their entitlements in the Pension Fund during the 2014-15 income year. As this was more than six months after your client became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in their assessable income. The 'applicable fund earnings' amount is 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) 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 remainder of 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) 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 that your client is assessed only on the income they earned on the benefits in the Pension Fund less any contributions they made since they became 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) 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) 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 considers what is the correct rule for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' under section 305-75 and states that each amount in a foreign currency that is an element in the calculation is to be translated to Australian dollars at 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 should be calculated by deducting the Australian dollar equivalent of the amount in the Pension Fund Vested in your client just before the day they became an Australian resident, from the amount received from the Pension Fund. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum. | Detailed Reasoning - Amounts to be used in calculation: The agreed value of the amount in the Pension Fund vested in your client on the day before your client became an Australian resident for tax purposes is an amount. This 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, nothing had been contributed to the Pension Fund since your client became a resident of Australia. During the 2014-15 income year, your client's benefit was transferred from the Pension Fund to the Australian Fund. This is converted into Australian dollars at the exchange rate that applied on that day. 'The period' for the purposes of paragraph 305-75(3)(c) commences on the day on which the person first became an Australian resident for tax purposes and ceases on the day the lump sum is paid. Your client was a resident for tax purposes 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 client's circumstances, the amounts to be used in calculating the applicable fund earnings for the Pension Fund is as follows: 305-75(3)(a)(i) The amount (converted to Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum) vested in your client before your client became a resident of Australia 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) The amount of the lump sum payment received, converted to Australian dollars 305-75(3)(c) 1 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from the Pension Fund: In accordance with subsection 305-75(3) the amounts determined at subparagraphs 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). Therefore, an amount should be included in your client's income tax return for the 2014-15 income year as the 'applicable fund earnings' amount in respect of the lump sum received from the Pension Fund. However, as your client no longer has an interest in the Pension Fund and your client's interest in that fund was made as a lump sum directly to a complying Australian superannuation fund, your client is eligible, provided the other requirements in section 305-80 of the ITAA 1997 are met, to make an election to have all or part of the applicable fund earnings treated as assessable income of his Australian superannuation fund. As a result, the amount of the applicable fund earnings specified in the election notice is 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 rate.