Private ruling: Lump sums received from certain foreign superannuation funds
Date of advice: 28 January 2016
Published: March 2016
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is any part of the lump sum benefit you received from an overseas fund (the Foreign Fund) assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: In the 19XX-XX income year, you arrived in Australia on a work contract and became an Australian resident for income tax purposes from that date. In the 19XX-XX income year, you left Australia to go overseas. Several months later, while living overseas, you became a member of the Foreign Fund. In the 19XX-XX income year, you returned to Australia and obtained permanent residency in Australia. During the ensuing period, you moved in and out of Australia several times. In the 200X-0X income year, you returned to Australia permanently. In the 20XX-XX income year you received a lump sum payment from the Foreign Fund. The Foreign Fund is registered overseas and its central management and control is overseas. The Foreign Fund does not pay benefits other than benefits in the nature of superannuation upon retirement or death and does not allow for access of benefits prior to retirement age. Contributions have been made to the Foreign Fund since you became a resident of Australia. No transfers were made into the Foreign Fund from any other foreign superannuation fund. You remained Australian resident for tax purposes during the time you spent overseas.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 295-95(2). | Income Tax Assessment Act 1997 Subdivision 305-B | Income Tax Assessment Act 1997 section 305-70. | Income Tax Assessment Act 1997 section 960-50.

Reasons for decision: Summary: No part of the lump sum you received from the Foreign Fund is included in your assessable income in the 20XX-XX income year as the applicable fund earnings amount. That is, the lump sum amount is not assessable income and is not exempt income. | Detailed Reasoning - Lump sum payments received from certain foreign superannuation funds: Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds. Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death. Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income. That is, it is tax-free. It (sections 305-60 of the ITAA 1997). Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income. | Detailed Reasoning - Meaning of '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 … Australian superannuation fund is defined in subsection 295-95(2) of the ITAA 1997 which provides that 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 . In accordance with subsection 995-1(1) of the ITAA 1997, superannuation fund has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), which provides that a fund is a superannuation fund if: (a) it is an indefinitely continuing fund; and (b) is a provident, benefit, superannuation or retirement fund ; or (c) a public sector superannuation scheme. 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. In that case, 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 accordance with section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for one or more of the 'core purposes'; or one or more of the 'core purposes' and one or more of the 'ancillary purpose', namely for the provision of benefits to a member on or after: • retirement from gainful employment; or • attaining a prescribed age; or • the member's death (this may require the benefits being passed on to a member's dependents or legal representative); or • the termination of member's employment with an employer who had, at any time, contributed to the fund in relation to the member; or • the member's cessation of work for gain or reward on account of ill-health. 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 the Superannuation Industry (Supervision) Regulations 1994 ) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. The Foreign Fund is established outside of Australia and its central management and control is outside of Australia. In addition, information provided indicates that benefits provided by the Foreign Fund are in the nature of superannuation upon retirement and death. Therefore, the Commissioner considers that the Foreign Fund is a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: You became a permanent resident of Australia during the 19XX-XX income year. A lump sum payment from the Foreign Fund was received by you during the 20XX-XX income year. As this was more than six months after you became an Australian resident, section 305-70 of the ITAA 1997 applies to the lump sum payment so that an amount of applicable fund earnings (if any) is included in your assessable income for the 20XX-XX income year. The 'applicable fund earnings' is the amount worked out under either subsections 305-75(2) or 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 becomes an Australian resident after the start of the period to which the lump sum relates. In your case, the amount included as assessable income is calculated under subsection 305-75(2) of the ITAA 1997 because you became an Australian resident before the start of the period to which the lump sum relates. Subsection 305-75(2) of the ITAA 1997 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) | 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$). The applicable fund earnings amount 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 considers what is the correct rule for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' under section 305-75 of the ITAA 1997 and states that each amount in a foreign currency that is an element in the calculation is to be translated to Australian dollars at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount in the Foreign Fund that is attributable to contributions made by you, or in respect of you, on or after the day when you became a member of the Foreign Fund from the amount vested in you when the lump sum was paid. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum. | Detailed Reasoning - Calculation of the assessable amount of lump sum payment from Zurich: In accordance with subsection 305-75(2) of the ITAA 1997, the amounts determined at sub-paragraphs 305-75(2)(a)(i) and (ii) are added. This total is then subtracted from the amount that was vested in you when the lump sum was paid. To this figure we add the amount determined under paragraph 305-75(2)(c) of the ITAA 1997. The amount worked out above represents your assessable 'applicable fund earnings' in respect of the lump sum received from the Foreign Fund. Because this amount worked out for you is less than zero, no part of the lump sum received by you from the Foreign Fund is included in your assessable income in the 20XX-XX income year. That is, the lump sum amount is not assessable income and is not exempt income.