Private ruling: Lump sum transfer from foreign pension fund.
Published: May 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the benefits transferred from your client's foreign pension fund to their Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: Your client migrated to Australia during the relevant income year. Your client held an interest in a foreign pension fund (the Foreign Fund). You advised that the value of the Foreign Fund four days after residency date was X. As your client could not obtain a value of the fund as at the date before they became an Australian resident, we have agreed to use the abovementioned value; X. During the subsequent income year, your client's total benefits of Y were transferred from the Foreign Fund to an Australian complying superannuation fund. Your client no longer has an interest in the Foreign Fund. There have been no contributions to the Foreign Fund since your client migrated to Australia. Funds cannot be accessed from the Foreign Fund other than at retirement.

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 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) | 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' in respect of the lump sum payment made from your client's foreign pension fund is calculated as zero. Consequently, no amount of the lump sum payment from the Foreign Fund will be included as assessable income in your client's Australian superannuation fund for the subsequent income year. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: 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 remainder of the lump sum payment is not assessable income and is not exempt income. The applicable fund earnings 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. 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. | 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. Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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), which requires that the fund is a provident, benefit, superannuation or retirement fund. | Detailed Reasoning - 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 ( Mahony ). In that case, 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. Based on the rules of the foreign pension fund, benefits are only paid to members on retirement and therefore the fund would meet the definition of superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with its central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner accepts that the lump sum payment was made from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: Your client became a resident of Australia for tax purposes during the relevant income year and received the lump sum payment in respect of the Foreign Fund during the subsequent income year. As this was more than six months after your client became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in the Australian superannuation fund's assessable income. 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: (c) 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: (d) work out the total of the following amounts: a. 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; b. 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; c. 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; (e) 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); (f) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; (g) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). In short, your client is assessed only on the income earned (the accretion) in respect of the Foreign Fund less any contributions made since becoming a resident of Australia. Further, any amounts representative of earnings during periods of non-residency and any transfers into the paying 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 (AU$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 to amounts that are elements in the calculation of another amount you need to: (a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and (b) then, calculate the other amounts. | Detailed Reasoning - Amounts to be used in calculation: It is accepted that the value of the benefit in the Foreign Fund on the day before your client became a resident of Australia was X. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of X to AU$X (cents ignored). From the facts provided no contributions have been made to the Foreign Fund since your client migrated to Australia. There have also been no transfers into the Foreign Fund from other foreign pension schemes since Australian residency. During the subsequent income year, your client's benefits in the Foreign Fund were paid out to your client in the form of a one-off lump sum of Y which was transferred directly into their complying Australian superannuation fund. Again, this is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of Y to AU$Y (cents ignored). 'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In your client's case they were a resident for the whole of that period, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1. There are no previously exempt fund earnings in relation to the lump sum. Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings for the Pension Fund are as follows: 305-75(3)(a)(i) X 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) Y 305-75(3)(c) 1 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from Pension Fund 1: In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added. X + nil + nil = X. This total is then subtracted from the amount determined under paragraph 305-75(3)(b), Y Y - X = -Z. This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1' -Z x 1 = -Z. To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil -Z + nil = -$Z. As the amount is less than zero, no amount of the lump sum payment from the Foreign Fund will be included as 'applicable fund earnings' in the assessable income of your client's Australian superannuation fund for the subsequent income year.