Private ruling: Applicable fund earnings and transfer from foreign fund
Date of advice: 2 July 2019
Published: September 2019
Ruling period: Financial year ended 30 June 2019.
Date scheme commenced: 12 October 2018

Ruling: Q1: Is the Fund a foreign pension fund as defined in section 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is a portion of the lump sum payment from the Fund assessable as 'applicable fund earnings' under section 305-70 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: · The Taxpayer was employed by a foreign entity · During the Taxpayer's period of employment, the Taxpayer was a member of two employee pension funds. Only one fund is relevant to the ruling application - the Overseas Pension Fund (the Fund). · The Fund is an occupational pension scheme administered by the foreign entity. · The Fund retains amounts on behalf of its members until they become eligible to receive a pension. A pension may be payable to a member where: · the member achieves pension age (commonly 60 years of age, unless stated otherwise but no earlier than 55 years of age); · the member becomes totally or partially incapacitated and is substantially required to leave the services of the Shell Group; or · upon the death of the member. · Should a member cease to be a member of the Fund prior to attaining eligibility to receive a pension whether by choice or by cessation of employment, the member can elect for their Cash Equivalent Transfer Value (CETV) to be transferred to a nominated pension scheme or other retirement benefit arrangement of their choosing. · Upon cessation of employment, the Taxpayer's interest in the Fund became a deferred pension with the value at that time based on final salary and total years of service with the foreign entity. · The Taxpayer transferred the full value of his interest in the Fund as a lump sum of to an Australian complying superannuation fund on financial year ended 30 June 2019 and thereafter had no further interest in the Fund. · The Taxpayer provided information with respect to his residence during the period to which the lump sum relates.

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 305-75(2). | Income Tax Assessment Act 1997 subsection 305-75(3). | Income Tax Assessment Act 1997 section 960-50. | Income Tax Assessment Act 1997 subsection 995-1(1). | Income Tax Assessment Regulations 1997 Regulation 960-50.01. | Superannuation Industry (Supervision) Act 1993 section 10. | Superannuation Industry (Supervision) Act 1993 section 62 .

Reasons for decision: Detailed Reasoning - Meaning of 'foreign superannuation fund': 1. 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. 2. 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: (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. 3. 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. | Detailed Reasoning - Meaning of 'superannuation fund': 4. ' Superannuation fund ' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA). 5. Subsection 10(1) of the SISA states: superannuation fund means: (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. 6. 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. | Detailed Reasoning - Meaning of 'provident, benefit, superannuation or retirement fund': 7. 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. 8. 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. 9. In accordance with section 62 of the SISA, a regulated superannuation fund must be maintained solely for one or more of the 'core purposes'; or for one or more of the core purposes and for one or more of the 'ancillary purposes'. 10. For the purposes of section 62 of the SISA, 'core purposes' means the provision of benefits: · on or after retirement from gainful employment; or · on attaining a prescribed age; or · on the member's death if the death occurred before the member's retirement or attaining the prescribed age. 11. In accordance with paragraph 62(1)(b) of the SISA, 'ancillary purposes' means: · the provision of benefits on or after termination of member's employment with an employer who had at any time contributed to the fund in relation to the member; or · provision of benefits on or after cessation of work on account of ill-health; or · provision of benefits on member's death if the death of the member occurred after member's retirement. 12. 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 (SISR)) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. 13. 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 and the SISR. 14. In the present case, the Fund allows withdrawal of benefits when members reach retirement age, or meet the definition of permanent incapacity, or death. The Fund is set up for the express purpose of providing for the payment of benefits in the nature of superannuation. Similar to an Australian superannuation fund, there are special circumstances where a member can request for an early withdrawal of their benefits prior to retirement age. These situations however, do not exclude the Fund from being recognised as a foreign superannuation fund. 15. Based on the above, the Fund meets the definition of 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 the Fund 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 the Fund to be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: 16. 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 is assessable under section 305-70 of the ITAA 1997. The remainder of the lump sum payment is not assessable income and is not exempt income. 17. The 'applicable fund earnings' is the amount worked out under either subsections 305-75(2) or 305-75(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. 18. There were no previous lump sums paid from the fund, and there are no 'previously exempt fund earnings'. Therefore, subsections 305-75(4), (5) and (6) of the ITAA 1997 and paragraph 305-75(3)(d) of the ITAA 1997 will not apply. 19. The Taxpayer became a resident of Australia and a member of the Fund on 6 August 1982. We are advised however that the period to which the lump sum relates commenced on 15 August 1980. Therefore, although the period to which the lump sum relates commenced prior to the Taxpayer becoming a resident, the Taxpayer could have had no interest in the Fund before the date of his joining the Fund. On the present facts, it is considered that the amount for the purposes of sub-paragraph 305-75(3)(a)(i) of the ITAA 1997 therefore can only be zero. 20. In the present case, no information has been provided that any amount is attributable to either contributions made by or on behalf of the Taxpayer, or that there were transfers from any other foreign fund. On the present facts, the amounts for sub-paragraphs 305-75(3)(a)(ii) and 305-75(3)(a)(iii) of the ITAA 1997 are both zero. 21. Therefore, the total amount for the purposes of paragraph 305-75(3)(a) of the ITAA 1997 is zero. 22. The amount vested in the Taxpayer when the lump sum was paid is taken to be equal to the amount of the lump sum. On the information available, this amount represents the full value of | Detailed Reasoning - Foreign currency conversion: 23. 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 amount 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 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. 24. The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in the Taxpayer's case: · item 11 which deals with a receipt or payment to which none of the other items apply, and · item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply. 25. The payment that the Taxpayer will receive is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the date of receipt. 26. When the amount in the Fund that was vested in the Taxpayer just before they became a resident of Australia is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency. 27. Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances.