Private ruling: Lump sum transfer from a foreign superannuation fund
Date of advice: 20 December 2019
Published: March 2020
Ruling period: Income year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the lump sum payments received from your foreign funds to an Australian superannuation fund assessable as 'applicable fund earnings' under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Taxpayer migrated to Australia and became a resident for tax purposes in 2011. The Taxpayer holds an interest in a Foreign Pension Scheme which is established and controlled in an overseas country. The Pension Scheme was established in 2015. The taxpayer's benefits in the Pension Scheme originated as follows; · The taxpayer was a member of an overseas fund. · All of the taxpayer's benefits were rolled an Australian fund in 2015. · The full roll-over amount that the taxpayer elected could not be completed due to the non-concessional cap. · The Australian Fund did not accept the amount that was in excess of the contributions cap. · The taxpayer established the Pension Scheme in 2015 and transferred the excess amount as a contribution. In 2019, on the Transfer Date, the Taxpayer transferred a lump sum benefit from the overseas scheme to their Australian bank account. The Taxpayer could not access their benefits in the Scheme other than at retirement. The Taxpayer has confirmed this. There have been no further contributions or amalgamations to the SIPP since the sole transfer. There were no periods of non-residency since the Residency Date for the Taxpayer. The exchange rate on the Transfer Date was published on the Australian Taxation Office's (ATO) website.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Subsection 305-70(4) | Income Tax Assessment Act 1997 Subsection 305-75(2) | 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 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 995-1(1) Reasons for decision | Summary | A portion of the lump sum payment transferred from the Foreign Funds must be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the 2018-19 income year. | Detailed reasoning | Lump sum payments transferred from foreign superannuation funds | If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable 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 becomes an Australian resident after the start of the period to which the lump sum relates. | However, before determining whether an amount is assessable under subsection 305-70(2) 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 subsection 305-70(2) 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) 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 funds 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. | 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 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; | 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 SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the following events occur: | (a) on or after retirement from gainful employment; or | (b) attaining a prescribed age; and | (c) on the member's death. (This may require the benefits being passed on to a member's dependants or legal representative). | 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 et cetera. | 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 its 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 SISA. | Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund: | (a) can also be used as a savings plan for non-retirement purposes; and/or | (b) contains provisions for pre-retirement withdrawals for general non-retirement purposes such as housing, education and medical expenses. | The Foreign Fund is a 'foreign superannuation fund 'as a Foreign Fund is governed by the pension rules within the overseas country in particular age-based restrictions on payments. | Accordingly, the Fund does fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will have application in this instance. | In accordance with section 305-70(2) of the ITAA 1997, the Taxpayer is required to include in their assessable income so much of the lump sum as equals their applicable fund earnings. | Applicable fund earnings | The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As the Taxpayer became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings are worked out in accordance with subsection 305-75(2) of the ITAA 1997 which states: | If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day ); | (ii) the part of the lump sum (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 income tax ); | (c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6). | The effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the Foreign Fund during the relevant period. | 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) 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. | 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 determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date. | The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in ATO Interpretative Decision ATO ID 2015/17: Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997. We use the exchange rate that applied when the taxpayer received the lump sum, to work out the Australian dollar equivalent for the amount in the foreign superannuation fund that was vested in the taxpayer on a certain date. | The amount transferred into the fund constitutes a contribution into the Foreign Fund | TR 2010/1 defines contributions as: | In the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general. | Furthermore TR 2010/1 states that the purpose of the transfer must also be reviewed when determining whether it is a contribution. | a person who transfers their benefits from one superannuation fund to another (whether that transfer constitutes a roll-over superannuation benefit or a transfer of a person's benefits from an overseas superannuation fund) is also a contribution because the person's purpose is to obtain superannuation benefits from the receiving fund. | Therefore a transfer into the Foreign Fund can be deemed as a contribution as the sole purpose of this transfer was to increase the capital for the taxpayer and also to obtain superannuation benefits from the receiving fund. | Calculation of the applicable fund earnings amount | The calculation of the applicable fund earnings for the lump sum received from the Foreign Fund is shown in the table below with reference to the facts of the case. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Item | Description | Amount in | GBP £ | Amount in | AUD ($) | Exchange rate = | A | Part of the lump sum from contributions into Pension Scheme. | £ | $ | B | Part of the lump sums from amounts transferred from other foreign funds. | £ | $ | C | A + B | (Calculated as per the step outlined in paragraph 305-75(2)(a) of the ITAA 1997) | £ | $ | D | Amount in the UK Fund vested in the taxpayer when the lump sum was paid ( date of receipt ) | £ | $ | E | D - C | (Calculated as per the step outlined in paragraph 305-75(2)(b) of the ITAA 1997) | £ | $ | F | Previously exempt fund earnings (if any) | £ | $ | G | Applicable fund earnings = E + F | (Calculated as per the steps outlined in paragraph 305-75(2)(c) of the ITAA 1997) | £ | $ | Therefore, the total 'applicable fund earnings' amount in respect of the lump sum payment transferred from the Foreign Funds should be included in the Taxpayer's assessable income for the 2018-19 income year. | However, applying 305-70(2) of the ITAA 1997, the Taxpayer is required to include in their assessable income so much of the lump sum as equals their applicable fund earnings.