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

Ruling: Q1: Is any part of the lump sums received from a retirement annuity established in the overseas country included in assessable income as applicable fund earnings for the year ended 30 June 2011? | A1: Yes. | Q2: Is any part of the lump sums received from a tax-deferred annuity retirement plan established in the overseas country included in assessable income as applicable fund earnings for the year ended 30 June 2012? | A2: Yes. | Q3: Are you entitled to a deduction under subsection 27H(2) of the Income Tax Assessment Act 1936 ? | A3: No.

Relevant facts and circumstances: Your client was born before 1950. Your client became a resident of Australia for tax purposes on a day in after 1 January 2005 (residency date). Your client retired in after 1 January 2011 at over age 65. Since then, your client has received two lump sum payments from the overseas country in respect of two retirement annuity (RA) contracts and you request a determination of the deductible amount (undeducted purchase price of a foreign pension or annuity) in relation to the two lump sum payments received. Withdrawals from your client's retirement plan contracts are subject to the retirement plan provisions of two entities where they were employed as outlined below: Retirement Annuity 1 is a tax-deferred annuity retirement plan (Annuity Account 1)- commenced in October 2002) · Allows for withdrawals once you separate from service (are no longer employed with the entity) · Withdrawals while you are still employed are not available regardless of your attained age. · Does not allow for in-service withdrawals should you experience financial hardship or become disabled. · Does not allow for loans against the accumulation in your retirement annuity (RA) contract. Retirement Annuity 2- is an optional retirement plan,(Annuity Account 2 commenced in December 2001). · Allows for withdrawals once you separate from service (are no longer employed with the entity) · Withdrawals while you are still employed are not available regardless of your attained age. · Withdrawal restrictions are present in the financial account in your retirement annuity (RA) contract. · Does not allow for in-service withdrawals should you experience financial hardship or become disabled. · Does not allow for loans against the accumulation in your RA contract. A portion of your client's accumulation is invested in the traditional account and cannot be withdrawn in a lump sum but instead, may be withdrawn through a Transfer Payout Annuity (TPA). The process involves an immediate transfer of the designated accumulation account to a new TPA contract. Once the accumulation has been transferred to the TPA, that amount is then distributed in 10 payments over nine years. Both Retirement Plans do not allow for Pre-Retirement withdrawals to pay for: · Educational expenses of the individual, spouse, children or grandchildren. · Expenses related to the purchase of the individual's first home. · Un-reimbursed medical expenses greater than 7.5% of the individual's adjusted gross income and other non-related uses. The situations described above would all fall under hardship withdrawal provisions. Whilst these types of withdrawals are often allowed under the plan provisions of employer sponsored Retirement Plans, neither of the plans allow/allowed for hardship withdrawals, thus your client was unable to take any Pre-Retirement withdrawals under any of the above scenarios. In after 1 June 2011, your client received a lump sum payment of foreign currency amount $X from Annuity account 1 (Annuity account 1 - remaining balance after this payment in June 2011 = 0). After 1 June 2011, an internal rollover occurred where your client rolled over foreign currency amount $Y from Annuity Account No.2 to Annuity Account 1- remaining balance after this rollover in June 2011 = foreign currency amount $Z. In after 1 July 2011 your client received a lump sum payment of foreign currency amount $A from Annuity Account 1). The value of the two RA contracts on the day before the residency date in January 2005 are: 1. Retirement Annuity 1 is a tax-deferred annuity retirement plan (Annuity Account 1) foreign currency amount $B. 2. Retirement Annuity 2- is an optional retirement plan,(Annuity Account 2) foreign currency amount $C.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Section 305-55. | 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 Paragraph 305-75(3)(a). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(b). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(c). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(d). | 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 .Section 770-5(1). | Income Tax Assessment Act 1997 .Subsection 770-10(1). | 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: A portion of the lump sum payments in respect of each retirement annuity contract is assessable as 'applicable fund earnings' in Australia and the deductible amount for undeducted purchase price does not apply. In short, your client is assessed only on the income earned (the accretion) in respect of each of the lump sum payment from the respective retirement annuity less any contributions made since they became a resident of Australia. The amount $M will be included as assessable 'applicable fund earnings' in the 2010-11 income year. The amount $N will be included as assessable 'applicable fund earnings' in the 2011-12 income year. | 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 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 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. 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 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 superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and · 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: · the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and · at that time, the central management and control of the fund is ordinarily in Australia; and · at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of: · the total *market value of the fund's assets attributable to *superannuation interests held by active members; or · 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 fund that: · is an indefinitely continuing fund; and · is a provident, benefit, superannuation or retirement fund; · or · 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 of the lump sum payments from the overseas retirement annuity contracts 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. It is evident from the information provided that the lump sum payments received are in respect of retirement annuity contracts issued by the overseas country retirement annuity plans that are established outside of Australia. The documentation also supports that the terms and conditions of the retirement plans are for retirement purposes only and generally require that benefits may only become payable on retirement and pre-retirement withdrawals are not permitted. Therefore, on the basis of the information provided, the Commissioner considers each of the lump sum payments 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 on a particular day in January 2005 (the residency date) and your client received the lump sum payments after 1 June 2011 (2010-11 income year) and after 1 July 2011 (2011-12 income year). These dates occur after the residency date. As both dates occur more than 6 months after your client became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in your client's assessable income for the relevant income year the lump sum payments are received. The 'applicable fund earnings' are 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) of the ITAA 1997 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: · work out the total of the following amounts: · 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; · 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; · 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; · 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); · multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; · 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 each of the lump sum payment from the overseas country retirement annuity plan less any contributions made since your client became a resident of Australia. Further, 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) of the ITAA 1997 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 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 Lump sum payment of foreign currency amount $X paid after 1 June 2011 Retirement Annuity 1 is a tax-deferred annuity retirement plan (Annuity Account 1) Statements from the above plan indicate no contributions were made by your client or an employer after the residency date. No amounts were transferred into the fund from other foreign superannuation funds during the period. After 1 June 2011, a lump sum payment of foreign currency amount $X was paid out. Therefore this is the amount vested in your client when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day. That rate converts the amount of foreign currency amount $X to AU $D (cents ignored). In accordance with the Commissioner's view 'the period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In your client's case, that period is the residency date in January 2005 to the payment date after 1 June 2011 and your client was a resident for the whole of that 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. The value of the annuity account on the day before the residency date was foreign currency amount $B and therefore is the amount vested on that day. This is converted into Australian dollars at the exchange rate that applied on that day. That rate converts the amount of $B to AU $E (cents ignored). Therefore, applying subsection 305-75(3) to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows: · 305-75(3)(a)(i) $E · 305-75(3)(a)(ii) Nil · 305-75(3)(a)(iii) Nil · 305-75(3)(b) $D · 305-75(3)(c) 1 · 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from foreign superannuation fund: In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added. $E + nil + nil = $E This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $D. $D less $E = $M This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1' $M x 1 = $M To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil $M + nil = $M The amount $M will be included as assessable 'applicable fund earnings' in the 2010-11 income year. | Detailed Reasoning - Calculation of previously exempt fund earnings in respect of lump sum payment of foreign currency amount $A in Annuity Account 1: Previously exempt fund earnings are amounts that would have been included in a person's assessable income at an earlier time under section 305-70 except that they were paid into another foreign superannuation fund. The balance of Annuity Account 1 after the first lump sum payment was made from Annuity Account 1 after 1 June 2011 was $0. On a later date after 1 June 2011, your client rolled over foreign currency amount $Y from Annuity Account No.2 to Annuity Account 1 which brought the balance of Annuity Account 1 to foreign currency amount $Z. In your client's case, part of the amount in the fund that was vested when the lump sum was paid after 1 July 2011 is attributable to a payment received (rolled over) from Annuity Account No.2 to Annuity Account 1 which brought the balance of Annuity Account 1 to foreign currency amount $Z after 1 June 2011. The previously exempt fund earnings is calculated as the amount that would have been included as assessable income but for the payment having been received in (rolled over to) Annuity Account 1. | Detailed Reasoning - Amounts to be used in calculation: Foreign currency amount $Y is the amount vested in your client when the rollover occurred ater 1 June 2011. This is converted into Australian dollars at the exchange rate that applied on that day. That rate converts the amount of $Y to AU $F (cents ignored). The value of the Retirement Annuity 2- optional retirement plan,(Annuity Account 2) on the day before the residency date in January 2005 = foreign currency amount $C and therefore is the amount vested on that day. This is converted into Australian dollars at the exchange rate that applied on that day. That rate converts the amount of $C to AU $G (cents ignored). Therefore, applying subsection 305-75(3) to your client's circumstances, the amounts to be used in calculating the applicable fund earnings the date of the internal rollover after 1 June 2011 are as follows: · 305-75(3)(a)(i) $G · 305-75(3)(a)(ii) Nil · 305-75(3)(a)(iii) Nil · 305-75(3)(b) $F · 305-75(3)(c) 1 · 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment included in assessable income as applicable fund earnings if the internal rollover did not occur:: In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added. $G + nil + nil = $G . This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $F $F less $G is negative $H This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1' negative $H 1 = negative $H To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil negative $H+ nil = negative $H As negative $H is an amount that is less than $0 (zero), there are no applicable fund earnings in respect of the internal roll-over and the previously exempt fund earnings calculated is also $0 (zero). Lump sum payment of foreign currency amount $A after 1 July 2011. After 1 July 2011, a lump sum payment of foreign currency amount $A from Annuity Account 1 was paid. Therefore this is the amount vested in your client when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day. That rate converts the amount of foreign currency amount $A to AU $J (cents ignored). Foreign currency amount $Y is the amount of the rollover that occurred after 1 June 2011 (the start day) and is the amount of the contributions to the account on the start day. This amount is converted into Australian dollars at the exchange rate that applied on that day. That rate converts the amount of foreign currency amount $Y to AU $K (cents ignored). The previously exempt fund earnings calculated in relation to the lump sum is $0 (Nil). In accordance with subsection 305-75(4), the start day is the day after your client received the most recent lump sum (after 1 June 2011 being the rollover date). Therefore, applying subsection 305-75(2) to your client's circumstances, as your client was a resident for the period of the lump sum after 1 June 2011 to after 1 July 2011, the amounts to be used in calculating the applicable fund earnings are as follows: · 305-75(2)(a)(i) $K · 305-75(2)(a)(ii) Nil · 305-75(2)(b) $J · 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. $K + nil = $K This total is then subtracted from the amount determined under paragraph 305-75(2)(b), $70,768 . $J less $K is $N To this figure we add the amounts determined under paragraph 305-75(2)(c) - nil $N + nil = $N The amount $N will be included as assessable 'applicable fund earnings' in the 2011-12 income year.

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