Private ruling: Lump sum transfer from a foreign super fund
Date of advice: 24 May 2017
Published: September 2017
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the retirement product established in Country A from a 'foreign superannuation fund' as per subsection 305-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is any part of the lump sum payment from Country A retirement product included in the taxpayer's assessable income as applicable fund earnings? | A2: Yes.

Relevant facts and circumstances: The Taxpayer arrived in Australia from Country A on a date in the 2012-13 income year (the Residency Date) and has been an Australian resident for tax purposes since that date. While living in Country A, the Taxpayer was a member of a foreign superannuation fund (Fund A) established and controlled in Country A. There were no contributions or pension amalgamations made to the Fund A while the Taxpayer was a resident of Australia. In the 2012-13 income year, the Taxpayer transferred the entirety of the balance in Fund A into another foreign superannuation fund, Fund B. In the 2015-16 income year, the Taxpayer transferred the entirety of his benefits from Fund B to a personal bank account in Australia. The exchange rate published by the Australian Taxation Office applied on the date of receipt. The Taxpayer has not been able to obtain the value of their benefits on the day before the Residency Date and has asked the Australian Taxation Office for an estimate.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 295-95 | Income Tax Assessment Act 1997 subdivision 305-B | Income Tax Assessment Act 1997 subsection 305-55(1) | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75 | 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 section 960-50 | Income Tax Assessment Act 1997 subsection 960-50(1) | Income Tax Assessment Act 1997 subsection 960-50(4) | Income Tax Assessment Act 1997 subsection 960-50(6) | 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: 1. Fund B is considered to be a foreign superannuation fund for the purposes of subdivision 305-B of the ITAA 1997. 2. The applicable fund earnings amount in respect of the lump sum payment made from Fund B to the Taxpayer's bank account in Australia is calculated as $X. This amount must be included as assessable income for the Taxpayer for the 2015-16 income year. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: 3. Under section 305-70 of the ITAA 1997, if a taxpayer transfers an amount from a foreign superannuation fund to Australia more than six months after their residency date, they must include in their assessable income so much of the lump sum that equals their applicable fund earnings. The amount of their applicable fund earnings is calculated under section 305-75 of the ITAA 1997. 4. However, 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 considered for the purposes of the legislation to be a foreign superannuation fund then section 305-70 of the ITAA 1997 will not have any application. | Detailed Reasoning - Foreign Superannuation Fund: 5. Under subsection 995-1(1) of the ITAA 1997 a foreign superannuation fund is defined as: (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. 6. Subsection 995-1(1) of the ITAA 1997 also defines an Australian superannuation fund as having the meaning given by section 295-95 of the ITAA 1997, that is basically, a fund that was established in Australia and its central management and majority of active members are located in Australia. 7. Subsection 995-1(1) of the ITAA 1997 also defines a superannuation fund as having the 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 (emphasis added). | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: 8. 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. 9. 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 be exclusively 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. 10. 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. 11. In section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member upon events such as the following: ● 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). 12. Though section 62 of the SISA also allows a superannuation fund to provide benefits for 'ancillary purposes', such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses. 13. Notwithstanding that the SISA only applies 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 operated outside of Australia, the Commissioner views the SISA (and its regulations) as providing guidance as to what 'benefit' or 'specific future purpose', a superannuation fund should provide. 14. 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. | Detailed Reasoning - Fund B: 15. Fund B would meet the definition of a superannuation fund as funds are ordinarily only obtainable once the member reaches retirement age, and early or special access provisions effectively mirror those of Australian legislation. In addition, it is clear Fund B, as the payer of the lump sum, is established outside of Australia with its central management and control outside of Australia. Therefore, on this basis, together with the above, the Commissioner considers that the lump sum the Taxpayer received to be from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Foreign currency conversion: 16. 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) 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. 17. In ATO Interpretative Decision ATO ID 2015/7 , the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner, in considering Item 11A of the table in subsection 960-50(6) of the ITAA 1997, determined that the exchange rate at which it is reasonable to translate amounts used in the method statements set out in section 305-75 of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. | Detailed Reasoning - Calculation of the applicable fund earnings amount: 18. In accordance with section 305-70 of the ITAA 1997, if a transfer is not completed within six months of a taxpayer's residency date, the taxpayer must include so much of the lump sum that equals their applicable fund earnings in their assessable income. 19. The amount of applicable fund earnings that a taxpayer must include is calculated under section 305-75 of the ITAA 1997. 20. The calculation of the applicable fund earnings for the Taxpayer is shown in the following tables below with reference to the facts. As discussed above, any amounts in Country A Dollars are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Agreed estimated value of the Taxpayer's interest in Fund A on the day before the Residency Date $X $X | Detailed Reasoning - B: Part of the payment attributable to contributions to Fund A during the remainder of the period $X $X | Detailed Reasoning - C: Part of the payment attributable to amounts transferred into Fund A from any other foreign funds superannuation funds during the remainder of the period $X $X | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) $X $X | Detailed Reasoning - E: Amount in Fund A vested in the Taxpayer when the lump sum was transferred into Fund B $X $X | Detailed Reasoning - E - D: (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) $X $X | Detailed Reasoning - G: The proportion of the total days during the period of which the Taxpayer was an Australian resident for tax purposes. 1 1 | Detailed Reasoning - H: Previously exempt fund earnings (if any) $X $X | Detailed Reasoning - I: (F x G) + H = Applicable Fund Earnings (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) $X $X 21. In accordance with subsection 305-70(4) of the ITAA 1997, the amount transferred from Fund A to Fund B is not assessable income and is not exempt income of the Taxpayer. However, the applicable fund earnings amount is counted as 'previously exempt fund earnings' for the purposes of calculating the applicable fund earnings amount in respect of the transfer from Fund B to the Taxpayer's personal bank account. | Detailed Reasoning - A: Amount in Fund B vested in the Taxpayer when the lump sum was paid. $X $X | Detailed Reasoning - B: Part of the transfer attributable to contributions into Fund B on or after the day the Taxpayer became a member of the fund. $X $X | Detailed Reasoning - C: Part of the transfer attributable to amounts transferred from other foreign funds into Fund B on or after the day the Taxpayer became a member of the fund. $X $X | Detailed Reasoning - B + C: (Paragraph 305-75(2)(a) of the ITAA 1997) $X $X | Detailed Reasoning - A - D: (Paragraph 305-75(2)(b) of the ITAA 1997) $X $X | Detailed Reasoning - F: Previously exempt fund earnings (if any). $X $X | Detailed Reasoning - G: E + F = applicable fund earnings amount. (Paragraph 305-75(2)(c) of the ITAA 1997) $X $X 22. Therefore the applicable fund earnings amount in respect of the lump sum payment transferred from Fund B that should be included in the Taxpayer's assessable income for the 2015-16 income year is $X.