Private ruling: Applicable fund earnings
Date of advice: 24 September 2015
Published: September 2015
Ruling period: Income year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Is any part of the amount transferred by the taxpayer from the first Foreign Pension to an Australian superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? 2. Is any part of the amount transferred by the taxpayer from the second Foreign Pension to an Australian superannuation fund assessable as applicable fund earnings under section 305-70 of the ITAA 1997? | A1: 3. Yes. 4. Yes.

Relevant facts and circumstances: The Taxpayer migrated to Australia a number of years ago and has been an Australian resident for tax purposes since that date. While living overseas, the Taxpayer became a member of two foreign pension funds (the Foreign Funds): Fund 1 and Fund 2. The Foreign Funds were established in the overseas country and their central management and control are in the overseas country. The Taxpayer cannot access their benefits in the Foreign Funds other than at retirement. During the 2014-15 income year, the Taxpayer transferred two lump sums from the Foreign Funds to an Australian complying superannuation fund (the Australian Fund). The trustees of both Foreign Funds were able to advise of, the amount that was vested in the Taxpayer on the day before the Taxpayer became an Australian resident. Since becoming an Australian resident, the Taxpayer has made no contributions to the Foreign Funds. The Taxpayer no longer holds any interests in the Foreign Funds. ATO Interpretative Decision 2015/7 (ATO ID 2015/7) was published on 13 February 2015. ATO ID 2015/7 provides the ATO view on 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 when an individual receives a superannuation lump sum from a foreign superannuation fund to which section 305-70 of the ITAA 1997 applies. The Taxpayer commenced the transfer process before February 2015 with the understanding that the previous view of translating foreign currency into Australian dollars would apply to the transfer. Had the view in ATO ID 2015/7 been known, the Taxpayer may have made the transfer differently.

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 Section 305-80 | Income Tax Assessment Act 1997 Section 960-50 | 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 All legislative references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision: Summary: The 'applicable fund earnings' amounts in respect of the lump sums transferred from Fund 1 and Fund 2 to the Australian Fund should be included in the Taxpayer's income tax return for the 2014-15 income year. However, as the Taxpayer no longer has any interests in the Funds, the Taxpayer is eligible to elect to have all or part of the applicable fund earnings treated as assessable income of the Australian Fund. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Section 305-70 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum (if any) in their assessable 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, 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 - Meaning of 'foreign superannuation fund': A foreign superannuation fund is defined in subsection 995-1(1) as a superannuation fund that is not an Australian superannuation fund. In accordance with subsection 295-95(2), 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 … Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia is not an Australian superannuation fund. Consequently, such a fund would be a foreign superannuation fund as defined in subsection 995-1(1). | Detailed Reasoning - The meaning of 'superannuation fund': ' Superannuation fund ' is defined in subsection 995-1(1) as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA) which states: superannuation fund means: (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. The High Court examined both the terms 'superannuation fund' and 'fund' in Scott v. Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; (1966) 10 AITR 290. 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. | Detailed Reasoning - Meaning of '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. 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. In accordance with section 62 of the SISA (Sole purpose test), a regulated superannuation fund must be maintained solely for the provision of benefits specified in subsection 62(1) of the SISA. The 'core purposes' specified in that subsection relate to providing retirement or death benefits for, or in relation to, fund members; and the 'ancillary purposes' relate to the provision of benefits on the cessation of a member's employment, other death benefits and other approved benefits. 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 its attendant regulations) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. In this case, it is clear that the Foreign Funds were established outside of Australia and that their central management and control are outside of Australia. In addition, the Taxpayer's benefits in the Foreign Funds are only payable upon retirement. As such, the Foreign Funds would meet the definition of a superannuation fund. Therefore, on the basis of the information provided, the Commissioner considers the Foreign Funds to be foreign superannuation funds for the purposes of section 305-70. | Detailed Reasoning - Applicable fund earnings: The Taxpayer became a resident of Australia for tax purposes a number of years ago and received the lump sum payment in respect of their entitlements in the Foreign Funds during the 2014-15 income year. As this was more than six months after the Taxpayer became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in their assessable income. The 'applicable fund earnings' amount is 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) 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 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 income 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). This means that the Taxpayer is assessed only on the income earned on their benefits in the Foreign Funds less any contributions they made since they became a resident of Australia. Any earnings made 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) 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) states that 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. Prior to the publication of ATO ID 2015/7 on 13 February 2015, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' was 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 the taxpayer first became an Australian resident. Law Administration Practice Statement PS LA 2011/27 titled 'Matters the Commissioner considers when determining whether the ATO view of the law should only be applied prospectively' (PS LA 2011/27) assist tax officers to determine whether to take action to apply the ATO view of the law in the past years or periods. Paragraph 4 of PS LA 2011/27 states that: The law operates from the date of effect of the relevant legislative provision and, accordingly, the ATO would usually apply its view of the law from this date, with effect both before and after the view is formed. Paragraph 25 of PS LA 2011/27 provides exceptions to this rule and one of those is where there is evidence that ATO conduct has reasonably conveyed a different view of the law on a particular issue. A clear instance of such a situation is where taxpayers have adopted a practice and the ATO has contributed to such a view or practice. Therefore for the purposes of section 305-70 of the TAA 1997, the previous ATO view for the foreign currency conversion can be used where the taxpayer's transfer documents to the foreign fund authorising the transfer of their lump sum entitlement to a complying Australian superannuation fund occurred prior to 13 February 2015. In this case the Taxpayer sent the transfer documents to the Foreign Funds to authorise the transfer of the Taxpayer's lump sum entitlements to a complying Australian superannuation fund 2015. The transfer documents were sent prior to the publication of ATO ID 2015/7 on 13 February 2015. As the Taxpayer had relied on the previous ATO view for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' and affected the transfer of the lump sum from the Funds before ATO ID 2015/7 was published, it is appropriate to have your private ruling determined according to the view that prevailed before publication on 13 February 2015. | Detailed Reasoning - Amounts to be used in calculation: The Taxpayer's total vested amounts in the Foreign Funds on the day before the Taxpayer became an Australian resident is converted into Australian dollars at the exchange rate that applied on that day before residency. From the facts provided no contributions have been made to the Foreign Funds since the Taxpayer migrated to Australia. The amount received in the 2014-15 income year is converted into Australian dollars at the exchange rate that applied on the date the respective payments were 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 the Taxpayer's case, that period would have been from the date they became an Australian resident to the date they received the payments provided the Taxpayer was a resident for the whole of that period. There are no previously exempt fund earnings in relation to the lump sums. | Detailed Reasoning - Calculation of the assessable amount of the payment from the foreign pension scheme: In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at subparagraphs 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). A portion of the lump sum payments transferred from Fund 1 and Fund 2 should be included in the Taxpayer's income tax return for the 2014-15 income year as the 'applicable fund earnings' amount. | Detailed Reasoning - Election: A taxpayer who is transferring their overseas superannuation benefits 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) to have all or part of the applicable fund earnings 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 rate. To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1). As the Taxpayer no longer has an interest in Fund 1 or Fund 2, the Taxpayer is eligible to make an election to have all, or part, of this amount treated as assessable income of the Australian Fund.