Private ruling: Lump sum payment from foreign superannuation fund
Published: December 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is any part of the lump sum payment transferred from your client's foreign pension scheme to an Australian superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: 1. Your client migrated to Australia during the relevant income year as a permanent resident. 2. Your client held an interest in a foreign pension (Foreign Fund). 3. The pension comprised wholly of transfers from several other foreign pension funds. The dates and amounts have been provided. 4. During the 2013-14 income year, your client's total benefits of 'X' were transferred from the Foreign Fund to an Australian complying superannuation fund. 5. Your client no longer has an interest in the Foreign Fund. 6. There have been no contributions to the Foreign Fund since your client migrated to Australia. 7. Funds cannot be accessed from the Foreign Fund other than at retirement.

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 Subsection 305-70(1) | 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 Subsection 305-75 (5) | Income Tax Assessment Act 1997 Subsection 305-75 (6) | Income Tax Assessment Act 1997 Subsection 306-70 | Income Tax Assessment Act 1997 Subsection 960-50(1) | Income Tax Assessment Act 1997 Subsection 960-50(4) | 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 the Skandia Foreign Pension Fund was calculated to be zero. Consequently, no amount of the lump sum payment from the Foreign Fund will be included in your client's assessable income in the 2013-14 income year. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: 1. 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 remainder of the lump sum payment is not assessable income and is not exempt income. 2. 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. 3. 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. 4. 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: 5. 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. 6. Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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. 7. 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), which requires that the fund is a provident, benefit, superannuation or retirement fund. | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: 8. 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 ). 9. In that case, 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. 10. 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). 11. 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. 12. Based on the rules of the foreign pension fund, benefits are only paid to members on retirement and therefore the fund would meet the definition of superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with its central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner accepts that the lump sum payment was made from a foreign pension fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Calculation of Assessable Amount: 13. Your client became a resident of Australia for tax purposes during the relevant income year and the payment was made during the 2013-14 income year. As this is 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 their assessable income. 14. The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. 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. 15. 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 (but before you received it) 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 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). 16. In short, your client is assessed only on the income earned (the accretion) in respect of the Foreign Fund less any contributions they made since they 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: 17. 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: (a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and (b) then, calculate the other amounts | Detailed Reasoning - Amounts to be used in calculation: 18. The total value of the benefits in the Foreign Fund on the day before your client became an Australian resident, was nil as the pension was comprised of amounts transferred from other foreign funds at later dates. 19. You have advised that no contributions were made to the Foreign Fund after your client became an Australian resident. 20. The amounts that were transferred into the Foreign Fund from other foreign superannuation funds during the period were converted into Australian dollars at the exchange rate that applied on that day. These amounts totalled 'Y'. 21. The amount your client received during the 2013-14 income year was X. Again, this is converted into Australian dollars at the exchange rate that applied on that day which converts the amount X to X (cents ignored). 22. 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. As your client was a resident for the whole of that period, the Australian resident days and the total days are the same. Therefore the proportion to be used in the calculation is 1. 23. There are no previously exempt fund earnings in relation to the lump sum. 24. 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) Nil 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Y 305-75(3)(b) X 305-75(3)(c) 1 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from foreign superannuation fund: 25. 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. nil. + nil + Y = Y 26. This total is then subtracted from the amount determined under paragraph 305-75(3)(b), X X - Y = negative Z. 27. This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1' -Z x 1 = -Z. 28. To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil -Z + nil = -$Z. 29. As the amount is less than zero, no amount of the lump sum payment from the Foreign Fund will be included as assessable 'applicable fund earnings' in your client's tax return for the 2013-14 income year. | Detailed Reasoning - Conclusion:: 30. No part of the lump sum payment from the Foreign Fund, which was transferred to your client's Australian superannuation fund, is assessable as the applicable fund earnings relating to the payment is nil.