Private ruling: Lump sum payment from a foreign superannuation fund
Published: August 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the lump sum payment paid to your client from an overseas Retirement Annuity Fund included as assessable income under section 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) ? | A1: No.

Relevant facts and circumstances: Your client migrated to Australia several years ago as a temporary resident on a specific Visa Class which was granted several years ago. Your client was granted permanent residency several years ago and became an Australian Citizen several years ago. Your client held an interest in a retirement annuity policy from an overseas country. Under the retirement policy of the Fund, payments of benefits are made on retirement, permanent incapacitation, or death. The Fund advised the value of your client's annuity policy on a specific date several years ago in the overseas country's currency. There have been no contributions to the annuity policy since your client migrated to Australia. There have been no transfers into the overseas Fund from other foreign pension schemes by your client since becoming a resident of Australia. The annuity policy was paid out to your client during the 2011-12 income year in the form of a lump sum and was paid into your client's bank account.

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 Paragraph 305-75 (3)(c). | Income Tax Assessment Act 1997 Subsection 305-75 (5). | Income Tax Assessment Act 1997 Subsection 305-75 (6). Income Tax Assessment Act 1997 Subsection 995-1(1). | Income Tax Assessment Act 1997 Subsection 960-50(1). Income Tax Assessment Act 1997 Subsection 960-50(4). Income Tax Assessment Act 1997 Subsection 960-50(6). | 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 paid on an annuity policy from an overseas retirement annuity fund is calculated as zero. Consequently, no amount of the lump sum payment from the annuity policy will be included in your client's assessable income in the 2011-12 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 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) 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. 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. 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 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 overseas fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must be a provident, benefit, superannuation or retirement fund as discussed above. The documentation provided indicates that in respect of your client's fund, benefits are only paid on retirement, permanent incapacitation, or death and the fund would meet the definition of a superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with their central management and control outside of Australia. 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 late February 20XX, and received the lump sum payment in respect of the annuity policy on mid September 20YY. 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 their assessable income. The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. 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); (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, your client is assessed only on the income earned (the accretion) in respect of the annuity policy less any contributions they have made since becoming a resident of Australia. 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 (A$). Furthermore subsection 960-50(4) of the ITAA 1997 provides that when foreign currency is an element in the calculation of another amount, translation must firstly occur prior to the calculation of any other amounts. Accordingly, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by: · translating the lump sum payment received from the overseas superannuation fund to Australian dollars at the exchange rate applicable on the day of receipt (item 11 of the table to subsection 960-50(6)); and · deducting from this amount the Australian dollar equivalent of the payment vested in the overseas superannuation fund at the exchange rate applicable on the day immediately before the residency date (item 11 of the table to subsection 960-50(6)). All exchange rates are published on the ATO website. | Detailed Reasoning - Amounts to be used in calculation: The benefit in the annuity policy on the day before your client became a resident of Australia was an amount. This is converted into Australian dollars at the exchange rate that applied on that day. From the facts provided, no contributions have been made to the annuity policy since your client migrated to Australia. There have also been no transfers into the annuity policy from other foreign pension schemes since your client became a resident of Australia. During the 2011-12 income year your client's benefits in the annuity policy was paid out to your client in the form of a one-off lump sum payment which was transferred directly into your client's overseas 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 '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. 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. There are no previously exempt fund earnings in relation to this 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 annuity policy are as follows: 305-75(3)(a)(i) The amount, converted to Australian dollars, vested in your client before they became a resident of Australia 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) The amount of the lump sum payment received, converted to Australian dollars 305-75(3)(c) 1 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment: 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). As the result is less than zero, no amount of the lump sum payment from the annuity policy will be included as assessable 'applicable fund earnings' in your client's tax return for the 2011-12 income year. | Detailed Reasoning - Conclusion:: No part of the lump sum payment from the annuity policy is assessable as the applicable fund earnings's relating to the payment is nil.