Private ruling: Foreign lump sum payment
Published: February 2015
Ruling period: Income year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: 1. Will any part of lump sum benefits received by the taxpayer from a foreign pension fund be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? 2. Is the taxpayer entitled to a lump sum in arrears tax offset on the lump sum payment in arrears? | A1: 1. Yes 2. No

Relevant facts and circumstances: The Taxpayer is a former foreign resident who became an Australian resident for tax purposes on a number of years ago. The Taxpayer held benefits in the Foreign Fund. The trustee of the Foreign Fund is not able to provide the value of the Taxpayer's benefit in the fund on the day just before the Taxpayer became a resident of Australia. In a conversation with a tax officer, the Taxpayer advised: • That they cannot access their benefits in the Foreign Fund other than at retirement in the foreign country. • There have been no contributions to the Foreign Fund since the Taxpayer became an Australian resident for tax purposes. • The Taxpayer no longer holds any interest in the Foreign Fund. • The lump sum payment and the payment in arrears were received as separate payments. In a conversation with tax officer, the Taxpayer agreed that an amount calculated would be used as the value of the Foreign Fund on the day just before the Taxpayer became a resident of Australia. During the 2013-14 income year, the Taxpayer received the full amount of their interests in the Foreign Fund. The Taxpayer also received a lump sum in arrears during the 2013-14 income year.

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 305-80(1) | Income Tax Assessment Act 1997 Subsection 305-80(2) | 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) | Income Tax Assessment Regulations 1997 Regulation 960-50.01 | 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' amount in respect of the lump sum payments made from the Foreign Fund that should be included in the Taxpayer's assessable income in the 2013-14 income year. The amount received as a lump sum payment in arrears should be included in the Taxpayer's assessable income in the 2013-14 income year under lump sum E. The Taxpayer is not entitled to receive the lump sum payments in arrears tax offset because the payment received is less than 10% of the Taxpayer's normal taxable income for the 2013-14 income year. | Detailed Reasoning - Detailed reasoning: The applicable fund earnings amount 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 Income Tax Assessment Act 1997 (ITAA 1997). The applicable fund earnings amount 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. 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. An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund. | Detailed Reasoning - Meaning of ''foreign superannuation fund': 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. 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; (iii) 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. | Detailed Reasoning - Meaning of 'superannuation fund': 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 (SISA). In accordance with subsection 10(1) of the SISA, 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. The High Court examined both the terms ' superannuation fund ' and ' fund ' in Scott v. Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (1966) 10 AITR 290. 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': 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. 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. In section 62 of the SISA, 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 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 ) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. It is clear that the Foreign Fund was established outside of Australia and its central management and control is outside of Australia. In addition, the Taxpayer's benefits in the Foreign Fund are only payable upon retirement. Therefore, on the basis of the information provided, the Commissioner considers that lump sums transferred from the Foreign Fund to the Australian Fund are payments from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: The Taxpayer became a resident of Australia for tax purposes a number of years ago and their benefits in the Foreign Fund were received during the 2014-15 income year. As this was more than six months after the Taxpayer became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' amount (if any) in their assessable income in the 2013-14 income year. The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As mentioned earlier, 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. 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: (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 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). This means that the Taxpayer is assessed only on the income they earned on the benefits in the Foreign Fund less any contributions the Taxpayer made since they became a resident of Australia. Any earnings made during periods of non-residency, and transfers into the Foreign 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 (A$). 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: (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. 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 this 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. Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The payments the Taxpayer received are not included in any of the other items in the table so they will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the time of receipt. When the amount in the Foreign Fund that was vested in the Taxpayer just before they became a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) 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. 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. In ATO Interpretative Decision ATO ID 2015/7, the Commissioner considers that, in the circumstances of this case, the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsections 305-75(2) and (3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by deducting the Australian dollar equivalent of the amount vested in the fund just before the day the Taxpayer first became an Australian resident, from the amount received from the Foreign Fund. Both amounts should be translated using the exchange rate applicable on the day of receipt. | Detailed Reasoning - Amounts to be used in the calculation: The Taxpayer's total vested amounts in the Foreign Fund on the day before they became an Australian resident are converted into Australian dollars at the exchange rate that applied on the date the payments were received. From the facts provided no contributions have been made to the Foreign Fund since the Taxpayer migrated to Australia. The amounts received in the 2013-14 income year are converted into Australian dollars at the exchange rate that applied on the dates the payments were received. '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 for tax purposes and ceases on the day the lump sum is paid. In the Taxpayer's case, that period would have been from the date they became an Australian resident to the date they received the payment, provided they were a resident for the whole of that period. There are no previously exempt fund earnings in relation to the lump sum. | Detailed Reasoning - Calculation of the assessable amount of the payment from the Foreign Fund: In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at subparagraphs 305-75(3)(a)(i), (ii) and (iii) are added. This total is then subtracted from the amount determined under paragraph 305 75(3)(b). This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c). To this figure we add the amounts determined under paragraph 305-75(3)(d). Consequently, the Taxpayer will include a portion of the lump sum payments transferred from the Foreign Fund to the Australian superannuation fund as assessable 'applicable fund earnings' in their return for the 2013-14 income year. | Detailed Reasoning - Lump sum in arrears: Section 159ZRA of the Income Tax Assessment Act 1936 states the conditions for an offset on lump sum payment in arrears: (1) Where: (a) the assessable income of the taxpayer of a year of income (in this Subdivision called the current year) includes one or more eligible lump sums; and (b) the total arrears amount is not less than 10% of the amount (if any) remaining after deducting that total arrears amount from the normal taxable income of the current year; the taxpayer is entitled to a rebate of tax, in the taxpayer's assessment for the current year, of the amount (if any) calculated in accordance with this Subdivision. (2) The rebate is only available to a natural person (otherwise than in the capacity of a trustee). The Taxpayer is not eligible for a lump sum payments in arrears tax offset as their total past tax year amount is less than 10% of their taxable income without past year amounts.