Private ruling: Lump sum payment from a foreign superannuation fund.
Published: June 2013
Date scheme commenced: 1 July 2012.

Ruling: Q1: Is any part of the benefits transferred from your foreign pension plan to your client's Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. This ruling applies for the following period: Year ended 30 June 2013.

Relevant facts and circumstances: Your client migrated back to Australia permanently on XX/XX/20XX. Your client held an interest in a pension scheme (the Pension Fund) in an overseas country. Your client has been unable to obtain the transfer value of their superannuation entitlement on or about the day they became a resident of Australia from their Pension Fund administrators. You have agreed that the value of the Pension Fund on the day before your client became an Australian resident was £Y. This figure was derived by reducing the value of your client's benefit at payment date by the Retail Price Index (RPI). Your client transferred the pension fund payment in full to Australia. Your client received a lump sum payment on YY/YY/20YY from the Pension Fund. The Pension Fund was then closed in the overseas country. There have been no contributions to the Pension Fund since your client migrated to Australia. There have been no transfers into the Pension Fund from other foreign pension schemes since becoming a resident of Australia. Funds cannot be accessed from the Pension Fund other than at retirement. Your client transferred this payment in full to a complying Australian superannuation fund.

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 transferred from the Pension Fund to your client's Australian superannuation fund is calculated as zero. Consequently, no amount of the benefit transferred from the Pension Fund will be included in your client's assessable income in the 2012-13 income year. | Detailed Reasoning - 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 superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and · 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. 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 Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 ( Mahony ). In that case, Justice Kitto's judgement indicated that a fund does not satisfy any of the three conditions of '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. Furthermore, section 62 of the SIS Act provides that 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). While 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 of 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 this case, the Pension Fund is a pension fund which is established outside of Australia. The Pension Fund has its central management and control outside of Australia, and furthermore, benefits are only paid to members on their retirement. Accordingly the Pension Fund is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. On the basis of the information provided, the Commissioner considers the lump sum payment you received to be from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: As noted, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a person's assessable income where the payment is received more than six months after becoming an Australian resident. As your client returned to Australia permanently on XX/XX/20XX, your client became a resident of Australia for tax purposes on this residency date. Your client received a lump sum payment in respect of the Pension Fund on YY/YY/20YY. As this was more than six 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 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: work out the total of the following amounts: · 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; · 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; · 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; · 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); · multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; · 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 Pension Fund less any contributions you 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 (AU$). 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, 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). | Detailed Reasoning - Amounts to be used in calculation: In this case, the value of the benefit in the Pension Fund on the day before your client became a resident of Australia is £Y. 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 Pension Fund since your client migrated to Australia. There have also been no transfers into the Pension Fund from other foreign pension schemes since your client became a resident of Australia. On YY/YY/20YY your client's benefits in the Pension Fund was paid out to your client in the form of a lump sum which was directly transferred into a complying Australian superannuation fund. 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 of benefits is paid. Your client was a resident for the whole of both those periods. 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 the lump sum amount transferred. Calculation of Assessable Amount 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), and added to the amounts determined under paragraph 305-75(3)(d). As a result of this calculation, the final figure is less than zero. As the amount is less than zero, no amount of the lump sum payment from the Pension Fund will be included in your client's Australian Superannuation fund's assessable income for the 2012-13 income year as 'applicable fund earnings'. Conclusion: No part of the payment made from the Pension Fund to the your client's Australian superannuation fund is assessable in the 2012-13 income year as the applicable fund earnings relating to the transfer payment is nil.