Private ruling: lump sum payment transferred from a foreign superannuation fund
Published: August 2011
Ruling period: 2009-10 income year
Date scheme commenced: 1 July 2009

Ruling: Q1: Is any part of the benefits transferred from an overseas pension scheme to an Australian superannuation fund assessable as 'applicable fund earnings' under subsection 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.


Relevant legislative provisions: Subsection 295-95(2) of the Income Tax Assessment Act 1997 | Subsection 295-200(3) of the Income Tax Assessment Act 1997 | Subsection 305-60 of the Income Tax Assessment Act 1997 | Section 305-70 of the Income Tax Assessment Act 1997 | Subsection 305-70(1) of the Income Tax Assessment Act 1997 | Section 305-75 of the Income Tax Assessment Act 1997 | Subsection 305-75(2) of the Income Tax Assessment Act 1997 | Subsection 305-75 (3) of the Income Tax Assessment Act 1997 | Subsection 305-75 (5) of the Income Tax Assessment Act 1997 | Subsection 305-75 (6) of the Income Tax Assessment Act 1997 | Subsection 305-80 of the Income Tax Assessment Act 1997 | Subsection 306-70 of the Income Tax Assessment Act 1997 | Subsection 960-50(1) of the Income Tax Assessment Act 1997 | Subsection 960-50(4) of the Income Tax Assessment Act 1997 | Subsection 960-50(6) of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997 | Section 10 of the Superannuation Industry (Supervision) Act 1993 | Section19 of the Superannuation Industry (Supervision) Act 1993 | Section 62 of the Superannuation Industry (Supervision) Act 1993

Reasons for decision: Summary: No amount of the lump sum payment transferred from the overseas pension scheme to your Australian superannuation fund will be included as 'applicable fund earnings' in the 2009-10 income year. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that are 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 are 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 are the amount worked out under either subsection 305-75(2) or subsection 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. 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: (c) a fund that: (iv) is an indefinitely continuing fund; and (v) is a provident, benefit, superannuation or retirement fund; or (d) 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 Commissioner of Taxation (Cth) (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 amount that was transferred from the overseas pension scheme to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above. Looking at the overseas pension scheme, it is evident it is established outside of Australia and the central management and control is outside of Australia. Retirement benefits are payable to members at retirement age (generally age 55 to 60 depending on when membership commenced). Benefits are calculated dependent on age, final pensionable pay and length of service. Therefore, on the basis of the information provided, the Commissioner the overseas pension scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 and any transfers from it to an Australian superannuation fund need to be considered under section 305-70 of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: You became a resident of Australia for tax purposes on a day in August 2009 (your residency date) and the foreign fund transfer occurred on a day in May 2010 (the transfer date). As this was more than 6 months after you became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' (not less than zero) in your assessable income for the 2009 -10 income year. The 'applicable fund earnings' are 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) 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: (e) work out the total of the following amounts: (iv) 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; (v) 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; (vi) 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; (f) 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); (g) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; (h) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). In short, you are assessed only on the income earned (the accretion) in respect of the foreign fund transfer less any contributions made since you became a resident of Australia. Further, 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. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states when applying section 960-50 to amounts that are elements in the calculation of another amount you need to: (c) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and (d) then, calculate the other amounts | Detailed Reasoning - Amounts to be used in calculation: The overseas pension scheme advised the transfer value as foreign currency amount 1 in the letter of February 2010. From the information provided, we calculated the value of your benefits on the day before you became a resident (the day before the residency date) as follows: | Detailed Reasoning - Total transfer value (foreign currency amount 1): At date of leaving Currently A pension - foreign currency amount 2 foreign currency amount 3 A lump sum - foreign currency amount 4 foreign currency amount 5 Total per annum value amount 1 Total per annum value amount 2 Using the total transfer value (foreign currency amount 1) divided by Total per annum value amount 2, we determined the commutation factor used was Factor X. By applying that commutation factor to the per annum value of your benefits payable at the date of leaving, we calculated the amount Y was the value of your benefits at that date. This amount Y will be used as the amount that was vested in you on the day before you became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day. Using that rate converts Y to AU $C (cents ignored). Statements from the overseas pension scheme indicate no contributions were made to the scheme on or after the date of residency. No amounts were transferred into the overseas pension scheme from other foreign superannuation funds during the period of membership. The total transfer value was an amount of $B. Therefore this is the amount vested in you when the transfer occurred in May 2010 (the transfer date). Your Australian superannuation fund confirmed the transferred amount $B was received from the overseas pension scheme on the transfer date. In accordance with the Commissioner's view '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. In your case, that period is the residency date to the transfer date and you were 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 the lump sum transfer. Therefore, applying subsection 305-75(3) to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows: 305-75(3)(a)(i) $C 305-75(3)(a)(ii) Nil 305-75(3)(a)(iii) Nil 305-75(3)(b) $B 305-75(3)(c) 1 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of the payment from foreign superannuation fund: In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added. $C + nil + nil = $C. This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $B. $B less $C is negative -$D This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1' - $D x 1 = - $D To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil - $D + nil = - $D As the amount is less than zero, no amount of the lump sum payment transferred from the overseas pension scheme to your Australian superannuation fund will be included as 'applicable fund earnings' under section 305-70 of the ITAA 1997 in the 2009-10 income year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You became a member of an overseas pension scheme in 2004. | You became a resident of Australia for tax purposes in August 2009. | No contributions were made to the overseas pension scheme after you became a resident. | The overseas pension scheme transferred an amount (foreign currency amount 1) to your Australian superannuation fund in May 2010. | Your Australian superannuation fund advised you the transferred amount received from the overseas pension scheme was Australian Dollars ($AU) $B. | You no longer have an interest in the overseas pension scheme. | You intend to have your Australian superannuation fund pay tax on your behalf on any applicable fund earnings in accordance with section 305-80 of the ITAA 1997. | In February 2010, the overseas pension scheme provided you with the estimate of your benefits as: | In order to determine your applicable fund earnings, you have assumed an average return of X% per annum based on a press release from the relevant overseas country that stated over 10 years, pension funds have averaged that X% rate of return. | On that basis, you stated the capital value of your benefits on the date in August 2009 (your residency date) would have been $A for it to grow to the $B by May 2010 with the applicable fund earnings calculated as $C. | You intend to elect for your Australian superannuation fund to pay tax on your behalf on that amount $C (15% X $C = $E).