Private ruling: Lump sum payment from a foreign superannuation fund
Published: March 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the lump sum payment received from a foreign superannuation fund (the Fund) assessable as applicable fund earnings? | A1: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Your client was a foreign resident who was employed overseas by an Employer until your client's resignation in the 2000-01 income year. Whilst employed, your client made contributions to a foreign fund (the Fund) which over the course changed its name. A copy of the Fund's rules have been provided and detail the Fund's operation and the circumstances under which benefits are paid. The Fund allows for the early release of benefits only when employment with the Employer ceases as a result of resignation, dismissal, retrenchment or redundancy. The Fund does not allow for the early release for purposes such as housing, medical expenses or education. In the 2000-01 income year your client became an Australian resident for tax purposes. Your client did not draw a pension from the Fund but, prior to migrating to Australia, your client's accrued pension benefits in the Fund were paid out. This formed part of your client's capital when your client came to Australia. Subsequent to becoming an Australian resident no contributions were made by your client, or by anyone on your client's behalf, to the Fund. In the 2009-10 income year your client was made aware that ex-employees of the Employer may be entitled to an additional payment from the Fund and your client subsequently contacted the Fund's manager (the Manager). In the 2011-12 income year, as shown on a credit advice, your client received a lump sum payment (the payment) from the Fund which was deposited to your client's Australian bank account. This advice detailed the payment as 'Pension'. In a letter from the Manager your client was advised: (a) the payment was electronically transferred to your client's bank account; (b) the payment was paid in accordance with a scheme fro the Fund to distribute additional amounts to members and former members; and (c) the payment made from the Fund in under the tax legislation in the overseas country. The Manager stated in later communication that: (a) the benefit paid to your client only arises as a result of an amendment made to legislation (the Act) in the overseas country. The amendment to the Act resulted members and former members being able to receive what the changes determined as being appropriate minimum benefits even though the benefits paid by the Fund in previous years were correctly determined in accordance with legislation which existed in previous years. The Scheme for the Fund provides only an additional benefit to be paid in cases where a member did not receive what the legislation now deems to be the minimum benefit; (b) the Scheme was approved in the 2009-10 income year and provided an amount to which your client was entitled to on the date of approval; (c) the lump sum payment your client received also included a late payment interest component; (d) the lump sum payment relates directly to the amendment to the Act and specifically the Scheme which created your client's entitlement on the date the Scheme was approved and no earlier. However, the Manager also states the payment is also in relation to your client's when employed with the Employer. Documentation in relation to the Scheme has been provided which details amongst other matters its operation and criteria in determining those eligible for a the additional payments. Your client is over 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2). | Income Tax Assessment Act 1997 Subsection 6-5(4). | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Section 305-60. | 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 960-50(1). | Income Tax Assessment Act 1997 Subsection 960-50(6). | Income Tax Assessment Act 1997 Subsection 995-1(1). | Superannuation Industry (Supervision) Act 1993 Section 10

Reasons for decision: Summary: The lump sum payment your client received from the overseas superannuation fund is assessable in Australia on the 'applicable fund earnings'. | Detailed Reasoning - Assessable income of an Australian resident: Subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a resident taxpayer includes ordinary or statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. In view of the above, the effect of subsection 6-10(4) of the ITAA 1997 is that assessable income is not restricted to receipts which satisfy the concepts of ordinary income but also encompasses statutory income which may include one off amounts. Section 10-5 of the ITAA 1997 lists the provisions in respect of statutory income. Included in this list is section 305-70 which includes as assessable income the applicable fund earnings in relation to lump sum payments from foreign superannuation funds received more that six months after a taxpayer has become an Australian resident. As your client is an Australian resident and received a lump sum payment from a foreign fund, in this case additional benefit, it is relevant to determine whether section 305-70 of the ITAA 1997 applies to your client . Though the lump sum payment your client received is tax free in the overseas country, this does not mean the payment is tax free in Australia. As mentioned earlier, an Australian resident taxpayer's assessable income comprises of ordinary or statutory income which the taxpayer derives directly or indirectly from all sources, whether in or out of Australia and accordingly subject to Australian taxation legislation. Further, it should be noted that the Advice referring to the payment as 'Pension' does not in itself make the payment a pension. The facts show that, unlike a pension which is periodic in nature, the payment is a one off lump sum payment from a foreign fund. As to whether any part of the lump sum payment from the Fund is assessable is discussed below. | 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, are assessable under section 305-70 of the 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. 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 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) 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 same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), 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; | Detailed Reasoning - 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 lump sum payment from the 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. It is evident that the payer of the lump sum payment, the Fund, is established outside of Australia. Similarly, the central management and control is outside of Australia. Further, the Fund only provides members with benefits which are consistent with what is expected of a superannuation fund as previously discussed. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment your client received is 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 in the 2000-01 income year and received the lump sum payment from the Fund in the 2011-12 income year when it went into your client's Australian bank account. As this was more than 6 months after your client became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your client'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: 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); (b) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; (c) 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 Fund less any contributions your client made since becoming 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. | 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: · first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and · then, calculate the other amounts | Detailed Reasoning - Amounts to be used in calculation: The documentation provided shows that your client's benefits in the Fund at the time of becoming a resident of Australia (a resident) amounted to Nil as all of your client's accrued benefits in the Fund were withdrawn prior to migrating to Australia. No contributions were made to the Fund by your client, or by anyone on your client's behalf, after your client became a resident. No amounts have been transferred into the Fund from other foreign superannuation funds during the period. In the 2011-12 income year, your client's benefits in the Fund were paid out in the form of a once-off lump sum which was directly deposited into your client's Australian bank account. Therefore this is the amount vested in your client when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day. The documentation provided shows what the lump sum payment was when converted into Australian currency. It is noted that the Manager stated the lump sum payment can relate to your client's service with the Employer, a period prior to your client becoming a resident. However, as also stated by the Manager, your client only became entitled to the lump sum payment directly as a result of an amendment to the overseas Act which occurred after your client became a resident. In view of the above, and the Manager stating that the benefits withdrawn by your client upon migrating to Australia were correct at that time, the lump sum payment received by your client cannot be considered a payment which would have formed part of the capital when your client migrated to Australia. '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, that period is from the date of becoming a resident in the 2000-01 income year to the date the lump sum payment was received in the 2011-12 income year in which your client was 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. The facts show there are no previously exempt fund earnings in relation to the lump sum. | Detailed Reasoning - Calculation of the assessable amount of the payment from foreign superannuation fund: In your client's case, the calculation made under subsection 305-70(3) of the ITAA 1997 shows there was a growth in the Fund while your client was a resident of Australia as the calculation resulted which was greater that zero. Accordingly, the amount calculated in accordance with subsection 305-70(3) of the ITAA 1997, the applicable fund earnings, is to be included as assessable income to your client in the 2011-12 income year.

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