Private ruling: a lump sum payment from foreign superannuation fund
Published: March 2012
Ruling period: 2011-12 income year
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the benefits transferred from overseas pension scheme to an Australian superannuation fund assessable as 'applicable fund earnings' under subsection 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You became a member of the overseas pension scheme, a pension fund in the overseas country in 2001. You became a resident of Australia for tax purposes in late 2008. No contributions were made to the overseas pension fund on or after the date you became a resident. The overseas pension fund advised the transfer value of your benefits was X on a day in December 2011. The overseas pension fund transferred X to your Australian superannuation fund, in December 2011. You were advised by the Australian superannuation fund of the amount that was transferred from the overseas pension fund. You no longer have an interest in the overseas pension fund. You intend to have your Australian superannuation fund pay tax on your behalf on any applicable fund earnings. The overseas pension fund is unable to provide you with a value of your policy as at the date you became an Australian resident and therefore the applicable fund earnings is not readily determinable. In June 2011, the overseas pension fund provided you with the estimate of your benefits as at a day in August 2008 (the last day of service): As at last day of service A pension of A A lump sum of B In order to determine your applicable fund earnings, you have assumed an average return of a percentage per annum based on a press release from the overseas country that stated that pension funds, over 10 years, have averaged a particular percentage as the rate of return. On that basis, you stated the capital value of your benefits on your residency date would have been AU$ C for it to grow to AU$ D by December 2011 with the applicable fund earnings calculated as AU$ E. You intend to elect for your Australian superannuation fund to pay tax on your behalf on that amount. Assumptions: Section 357-110 of Schedule 1 to the Taxation Administration Act 1953 (TAA) gives the Commissioner a power to make assumptions which he considers to be most appropriate. As you cannot provide us with the value of your benefits in the overseas pension fund on or around the day you became a resident, we advised you in telephone discussion in March 2012 that an assumption will be made of that value by using a calculation based on the relevant index that measures increases in cost of living expenses in the overseas country; and the value of your transferred benefits in December 2011. You gave your agreement to this. On that basis and in issuing this ruling, the Commissioner will make the assumption of the value of your benefits in the overseas pension fund on the day before you became a resident as Y.

Relevant legislative provisions: Subsection 295-95(2) of the Income Tax Assessment Act 1997 | Subsection 295-200(3) of the Income Tax Assessment Act 1997 | Subsection 305-60 of the Income Tax Assessment Act 1997 | Section 305-70 of the Income Tax Assessment Act 1997 | Subsection 305-70(1) of the Income Tax Assessment Act 1997 | Section 305-75 of the Income Tax Assessment Act 1997 | Subsection 305-75(2) of the Income Tax Assessment Act 1997 | Subsection 305-75 (3) of the Income Tax Assessment Act 1997 | Subsection 305-75 (5) of the Income Tax Assessment Act 1997 | Subsection 305-75 (6) of the Income Tax Assessment Act 1997 | Subsection 305-80 of the Income Tax Assessment Act 1997 | Subsection 306-70 of the Income Tax Assessment Act 1997 | Subsection 960-50(1) of the Income Tax Assessment Act 1997 | Subsection 960-50(4) of the Income Tax Assessment Act 1997 | Subsection 960-50(6) of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997 | Section 10 of the Superannuation Industry (Supervision) Act 1993 | Section19 of the Superannuation Industry (Supervision) Act 1993 | Section 62 of the Superannuation Industry (Supervision) Act 1993

Reasons for decision: Summary: Summary No amount of the lump sum payment transferred from the overseas pension fund to your Australian superannuation fund will be assessable as 'applicable fund earnings' in the 2011-12 income year. | Detailed Reasoning - 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 are received more than six months after a person has become an Australian resident will be assessable under section 305-70 of the 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 are the amount worked out under either subsection 305-75(2) or subsection 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. 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. 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; 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 the amount that was transferred from the overseas pension fund 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. Looking at the overseas pension fund, it is evident it is established outside of Australia and the central management and control is outside of Australia. Retirement benefits are payable to members at retirement age (normal retirement age being age 65). Early retirement and ill health retirement is permitted in limited circumstances subject to meeting strict guidelines. Benefits are calculated based on final pay and total days of membership. Therefore, on the basis of the information provided, the Commissioner considers the overseas pension fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 and any transfers from it to an Australian superannuation fund need to be considered under section 305-70 of the ITAA 1997. Applicable fund earnings You became a resident of Australia for tax purposes on a day in September 2008 and the foreign fund transfer occurred on a day in December 2011. As this was more than 6 months after you became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' (not less than zero) in your assessable income for the 2011-12 income year. 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, you are assessed only on the income earned (the accretion) in respect of the foreign fund transfer less any contributions made since you 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. 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 Amounts to be used in calculation The overseas pension fund advised the transfer value of your benefits as at the transfer date in December 2011 as X and we used this transfer value to calculate an estimate of the value of your benefits on residency date as Y. We worked out the estimate on the basis that the overseas pension fund calculated increases in your benefits based primarily on the relevant index that measures the increases in cost of living expenses in the overseas country. The result being the value of your benefits increased by a calculated percentage to be X on the transfer date in December 2011. This amount of Y will be used as the amount that was vested in you on the day before you became a resident of Australia. 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). No contributions were made to the scheme on or after your residency date in September 2008. No amounts were transferred into the fund from other foreign superannuation funds during the period of membership. The total transfer value was an amount X. Therefore this is the amount vested in you when the transfer occurred in December 2011. This is converted into Australian dollars at the exchange rate that applied on that day. That rate converts the amount of X to AU $G (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 case, that period is from your residency date in September 2008 to the date your benefits were transferred in December 2011 and you were 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 transfer. 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) $F 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) $G 305-75(3)(c) 1 305-75(3)(d) Nil 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. $F + nil + nil = $F. This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $G. $G less $F is negative - $H. This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1' - $H x 1 = - $H To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil - $H + nil = - $H As the amount is less than zero, no amount of the lump sum payment transferred from the overseas pension fund to your Australian superannuation fund will be included as 'applicable fund earnings' under section 305-70 of the ITAA 1997 in the 2011-12 income year.

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