Private ruling: Foreign source lump sum payment
Date of advice: 11 December 2018
Published: April 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the Overseas Fund a foreign superannuation fund under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: If the Overseas Fund is a foreign superannuation fund, would the amount transferred from your Overseas Fund to your Australian bank account be assessable as ‘applicable fund earnings’ under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes

Relevant facts and circumstances: You permanently migrated from Country A to Australia in September 19XX. You became an Australian citizen in January 19YY. The Overseas Fund is registered and operates in Country A. You have been a permanent resident of Australia for taxation purposes since September 19XX. You have not made any payments into the Overseas Fund since September 19XX. In 20XX you cashed in your Country A pension as a lump sum payout which was transferred into your Australian bank account. From your Australian bank account you transferred the funds into your Australian superannuation fund. The lump sum totalled XX and was taxed by Country A at 25% (XX), leaving a net amount of XX. A letter from the Overseas Fund in response to the request to withdraw your pension as a single lump sum and confirmed that you are able to withdraw your benefits at any time from your 55 birthday. You have a letter from the Overseas Fund confirming that: i) Your policy did not allow withdrawals before the age of 55. ii) Your fund was not an indefinitely continuing fund. iii) Your fund was a retirement fund. iv) If you (as the policyholder) had been diagnosed with a critical illness, they might have been liable to withdraw the benefits before the age of 55 depending on the outcome of the claim Your policy has never had any Protected Early Retirement Age applicable. As the policy was a personal pension, you could only withdraw your benefits on or after your 55 birthday.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 295-95(2) | Income Tax Assessment Act 1997 section 305-55 | Income Tax Assessment Act 1997 subsection 305-55(2) | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 subsection 305-75(2) | Income Tax Assessment Act 1997 subsection 305-75(3) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: 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. Relevantly, 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. | Detailed Reasoning - Meaning of ‘superannuation fund’: ‘Superannuation fund’ is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the SISA 1993. Subsection 10(1) of the SISA 1993 provides that a 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. In your situation, your Overseas Fund was not an indefinitely continuing fund and thus it is not considered to be a superannuation fund under subsection 10(1) of the SISA 1993. However, based on the facts in relation to your Overseas Fund, we can say that the extended definition of a foreign superannuation fund under section 305-55 of the ITAA 1997 would apply. This is because your Overseas Fund is classified as a scheme designed for retirement purposes and it satisfies the criteria set out under subsection 305-55(2) of the ITAA 1997 as follows: a. Your retirement fund has never been a foreign superannuation fund as it is not an indefinitely continuing fund and hence not satisfying the definition of a ‘superannuation fund’ under the SISA 1993; b. Your retirement fund was established in the Country A; and c. Your retirement fund was centrally managed and controlled in the Country A (i.e. not in Australia). | Detailed Reasoning - Applicable fund earnings: As your Overseas Fund meets the extended definition of a foreign superannuation fund under section 305-55 of the ITAA 1997, the lump sum payment you received in Australia through your Australian bank account in 20XX will be assessed based on the amount of applicable fund earnings relating to the payment. Since you have been an Australian resident for taxation purposes for more than 6 months when you received the lump sum payment in Australia, the amount of applicable fund earnings in relation to your lump sum would be assessed under section 305-70 of the ITAA 1997. The procedure used to calculate the amount of applicable fund earnings associated with your lump sum payment received in Australia depends on whether or not you were an Australian resident when you joined your Overseas Fund. If you joined your Overseas Fund before you became an Australian resident, the amount of applicable fund earnings on your lump sum payment would be calculated using the procedure set out under subsection 305-75(3) of the ITAA 1997. However, if you joined your Overseas Fund after you became an Australian resident, the amount of applicable fund earnings on your lump sum payment would be calculated using the procedure set out under subsection 305-75(2) of the ITAA 1997. | 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) 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 Income tax / Superannuation Foreign currency translation rules in working out ‘applicable fund earnings’ under section 305-75 of the ITAA 1997 , the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner, in considering Item 11A of the table in subsection 960-50(6) of the ITAA 1997, determined that the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsections 305-75(2) and (3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.