Private ruling: Applicable fund earnings
Published: July 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is any part of the lump sum payment received from Fund 1 assessable as applicable fund earnings? | A1: Yes. | Q2: Is any part of the lump sum payment received from Fund 2 assessable as applicable fund earnings? | A2: Yes.

Relevant facts and circumstances: You migrated to Australia number of years ago as a permanent resident. You held an interest in two overseas pension schemes (Fund 1 and Fund 2) since you migrated to Australia. There have been no contributions to either scheme since you migrated to Australia. You cannot access your benefits in either of the overseas pension schemes, other than at retirement. There have been no transfers into either overseas pension scheme from other foreign pension schemes since you became an Australian resident. Your benefits were paid to you in the 2014 income year, from each of the two Funds, in the form of one-off lump sums which were transferred directly into your superannuation fund, a complying Australian superannuation fund. You have advised that an election has been made for specific amounts to be included in the assessable income of your Australian superannuation fund.

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 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 Paragraph 305-75(3)(a) | Income Tax Assessment Act 1997 Paragraph 305-75(3)(b) | Income Tax Assessment Act 1997 Paragraph 305-75(3)(c) | Income Tax Assessment Act 1997 Paragraph 305-75(3)(d) | Income Tax Assessment Act 1997 Subsection 305-75(5) | Income Tax Assessment Act 1997 Subsection 305-75(6) | 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) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 19 | Superannuation Industry (Supervision) Act 1993 Section 62 | Income Tax Assessment Regulations 1997 Regulation 960-50.01

Reasons for decision: Summary: A portion of the lump sum payments transferred from Fund 1 and Fund 2 to your complying superannuation fund in Australia will be included as assessable 'applicable fund earnings' in your income tax return for the 2013-14 income year. As you no longer have an interest in the pension schemes you are eligible to make an election to have these applicable fund earnings treated as assessable income of your Australian superannuation fund. You have advised that an election has been made for specific amounts to be included in the assessable income of your Australian superannuation fund. As the total amount of applicable fund earnings we have calculated differs to the amount you have elected, we advise that you will need to contact your Australian superannuation fund to discuss any amendments to the amounts elected. | Detailed Reasoning - Detailed reasoning: 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 applicable fund earnings is subject to tax at the person's marginal rate. The remainder of the LSP 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 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 was not an Australian resident at all times during 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 entity making the payment is 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: 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 an 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. 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. In this case, the lump sum benefits were transferred from foreign pension funds. It is evident that the foreign pension schemes are pension schemes established overseas and are not Australian superannuation funds as defined in subsection 295-95(2) of the ITAA 1997. However, part of the definition of a foreign superannuation fund also requires consideration of what constitutes a superannuation or retirement 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 1993), which requires that the fund is a provident, benefit, superannuation or retirement fund. | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: The High Court examined both the terms superannuation fund and fund in Scott v. Federal Commissioner of Taxation (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. Federal Commissioner of Taxation (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 judgment 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 1993, 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 1993 applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA 1993), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA 1993 (and its attendant 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 1993. Therefore, in order for a lump sum payment 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). 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. In your case, it is evident that Funds 1 and 2 were established outside of Australia with their central management and control outside of Australia. Funds 1 and 2 are not Australian superannuation funds as defined in subsection 295-95(2) of the ITAA 1997. In addition, information provided in relation to both Funds indicates benefits are only paid on retirement and both Funds would meet the definition of superannuation fund. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payments you received are from foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: You became a resident of Australia for tax purposes a number of years ago when you migrated to Australia as a permanent resident. Lump sum payments were made from the overseas funds in the 2014 income year. As these payments were made more than six months after you became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings', (if any), in your assessable income. 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. 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). In short, you are assessed only on the income earned (the accretion) in respect of the foreign funds less any contributions you 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 benefits are 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. 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 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 your 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 payment you finally received 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 time of receipt. When the amount in the foreign fund that was vested in you just before you 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 (ITAR 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 (A$) at an exchange rate that is reasonable having regard to the circumstances. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars and deducting from this amount the Australian dollar equivalent of the amount vested in the fund at the exchange rate applicable just before the day you first became an Australian resident. | Detailed Reasoning - Amounts to be used in calculation: During the 2014 income year, your benefits in the overseas pension scheme were transferred to a complying Australian superannuation fund capable of receiving overseas pension transfers. Your total vested amount in the overseas fund on the day before you became an Australian resident is converted into Australian dollars at the exchange rate that applied on the day before you became an Australian resident. From the facts provided no contributions have been made to the overseas pension fund since you migrated to Australia. The amount received in the 2013-14 income year is converted into Australian dollars at the exchange rate that applied on the date the payment was 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 your case, that period would have been from the date you became an Australian resident to the date you received the payment and 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 overseas pension scheme: In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at sub-paragraphs 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). Because the amount, in Australian dollars, vested in you before you became a resident of Australia is lower than the actual amount of the lump sum payment of benefits received, in Australian dollars, the result of this calculation is positive. As the amount is greater than zero, a portion of the lump sum payment transferred from the overseas pension scheme to the Australian superannuation fund must be included as assessable 'applicable fund earnings' in your tax return for the 2013-14 income year. The same method as explained above, applies in relation to the calculation of the assessable amount of the lump sum payment from Fund 2. | Detailed Reasoning - Election: A taxpayer who is transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have part of the payment treated as assessable income of the Australian superannuation fund. As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15%, rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal tax rate. To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997. As you no longer have an interest in the overseas pension schemes, you are eligible to make the election.