Private ruling: Lump sum payment from a foreign superannuation fund
Date of advice: 1 April 2017
Published: September 2017
Ruling period: Income year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the registered retirement savings plan established in Country A a superannuation fund for the purposes of Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: 1. A person (the Taxpayer) migrated to Australia from Country A and became a resident of Australia for taxation purposes. 2. While living in Country A, the Taxpayer was employed by an entity (the Employer) and became a member of the Pension Plan for Employees (the Pension Plan). 3. The Taxpayer notified the Employer of their intention to retire. 4. Consequently, the Taxpayer's participation in the Pension Plan terminated and they were required to make an election in respect of the funds in the Pension Plan. 5. The Taxpayer opened a Locked-in Registered Retirement Account (the LIRA). 1. The LIRA is a Registered Retirement Savings Plan (RRSP) which does not allow for early access of benefits under the Home Buyer's Plan or the Life Long Plan. 2. In the Province B, LIRAs are governed by both Country A legislation being the Income Tax Act (ITA) and Province B provincial legislation being the Pension Benefits Act (PBA) and are administered by the Relevant Financial Services Commission. 3. The funds in a LIRA are 'locked-in' and can only be used to accumulate retirement income. Ordinarily, the funds cannot be paid out in cash, but instead must be used to provide income when the plan member retires. .However, there are instances where a member can gain 'special access' to their funds prior to retirement age. Withdrawals under special access are permitted where: ● The plan member has an illness or physical disability that is likely to shorten the member's life expectancy to less than two years; ● The member is age 55 years or older and the total value of the funds in the member's locked-in accounts is less than a specified amount; ● The member's locked-in assets exceed federal ITA limits. As this situation attracts penalties, members have the opportunity to withdraw excess assets in order to avoid paying the penalty in future; and ● The member is facing certain types of financial hardship which are specified under Province B provincial legislation. ● Non-residents of Country A can unlock and withdraw their funds from Province B locked-in accounts two years after departing Country A. 1. After Taxpayer departed Country A and arrived in Australia. They continued their employment with the Employer in Australia until they retired. 2. The Taxpayer made a single contribution to their LIRA. 3. The Taxpayer intends to transfer their benefits from the LIRA to an Australian superannuation fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 305-B | 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 306-60. | Income Tax Assessment Act 1997 section 307-15. | Income Tax Assessment Act 1997 subsection 995-1(1). | Income Tax Assessment Act 1997 section 960-50(1). | Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision: Summary: The Country A RRSP is a superannuation fund for the purposes of subdivision 305-B of the ITAA 1997. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: Subdivision 305-B of the ITAA 1997 deals with the tax treatment of superannuation benefits paid from certain foreign superannuation funds. In accordance with sections 305-60 of the ITAA 1997, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income. If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable income. | 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. Relevantly, 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 … 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 in accordance with subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Meaning of 'superannuation fund: 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 (SISA), 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; 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 accordance with section 62 of the SISA ( Sole purpose test ), a regulated superannuation fund must be maintained solely for the provision of benefits specified in subsection 62(1) of the SISA. The 'core purposes' specified in that subsection relate to providing retirement or death benefits for, or in relation to, fund members; and the 'ancillary purposes' relate to the provision of benefits on the cessation of a member's employment and other death benefits and other approved benefits. 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 the Superannuation Industry (Supervision) Regulations 1994 ) 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. The information provided indicates that i n the province of Province B, LIRAs are governed by both Canadian federal legislation being the Income Tax Act (ITA) and Province B provincial legislation being the Pension Benefits Act (PBA) and are administered by the Financial Services Commission of Province B (FSCO). The funds in a LIRA are 'locked-in' and can only be used to accumulate retirement income. Ordinarily, the funds cannot be paid out in cash, but instead must be used to provide income when the plan member retires. However, there are instances where a member can gain 'special access' to their funds prior to retirement age. Withdrawals under special access are permitted where: ● The plan member has an illness or physical disability that is likely to shorten the member's life expectancy to less than two years; ● The member is age 55 years or older and the total value of the funds in the member's locked-in accounts is less than a specified amount; ● The member's locked-in assets exceed federal ITA limits. As this situation attracts penalties, members have the opportunity to withdraw excess assets in order to avoid paying the penalty in future; and ● The member is facing certain types of financial hardship which are specified under Province B provincial legislation. ● Non-residents of Country A can unlock and withdraw their funds from Province B locked-in accounts two years after departing Country A. Therefore, it is considered that the LIRA is considered to meet the definition of a superannuation fund. In addition, it is clear the RRSP is established outside of Australia and its central management and control is outside of Australia. Therefore, on the basis of the information provided, we consider that the Scheme is a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997. | Detailed Reasoning - Taxation of foreign lump sum payments: As the Taxpayer will receive the lump sum more than six months after their residency, section 305-70 of the ITAA 1997 applies to the lump sum received so that the amount of applicable fund earnings (if any) in respect of the lump sum is included in the Taxpayer's assessable income. | Detailed Reasoning - Applicable fund earnings: The applicable fund earnings amount is 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 becomes an Australian resident after the start of the period to which the lump sum relates. As the Taxpayer became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings is worked out in accordance with subsection 305-75(3) of the ITAA 1997 which states: If you become an Australian resident after the start 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 following amounts: (i) The amount in the fund that 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 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). *To find definitions of asterisked terms, see the Dictionary, starting at section 995-1 The effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the Fund during the residency period. Earnings made during periods of non-residency, and contributions and transfers into the Fund, do not form part of the taxable amount when the lump sum 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$). The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 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: Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997 (ATO ID 2015/7), the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date. All exchange rates are published on the ATO's website. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of the lump sum to be received from the Fund should be calculated by deducting the Australian dollar equivalent of the amount vested in the Taxpayer just before the residency date from the amount vested in the Taxpayer on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt. | Detailed Reasoning - Election under section 305-80 of the ITAA 1997: A person may choose to have a superannuation lump sum from a foreign superannuation fund transferred to a complying superannuation fund rather than being paid directly to the person. In such a case, the person may elect under section 305-80 of the ITAA 1997 for all or part of their applicable fund earnings amount to be included in the assessable income of the complying superannuation fund. However, the choice can only be made if the conditions in subsection 305-80(1) of the ITAA 1997 are satisfied, that is if: ● the person is taken to have received the lump sum under section 307-15 of the ITAA 1997; ● whole of the lump sum is paid directly from the foreign superannuation fund into a complying superannuation fund; and ● the person no longer has an interest in the foreign superannuation fund immediately after the lump sum is paid. A person is taken to have received a payment under section 307-15 of the ITAA 1997 if it is made: ● for the person's benefit; or ● to another person or to an entity at the person's direction or request. Therefore, if a person meets the above requirements for election their complying superannuation fund will pay tax on the applicable fund earnings at the concessional rate of 15%. If a person does not wish to make the election, or does not meet the conditions to allow them to make the election, they must include their applicable fund earnings in their assessable income.