AAT decision on the assessable component (applicable fund earnings) of foreign super fund transfers

The AAT decision of Came and Commissioner of Taxation [2023] AATA 3951 highlights some complexities related to foreign superannuation fund transfers to Australian superannuation funds under the rules in sub-div 305-B of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

Facts

The taxpayer, Mr James Came, migrated from South Africa to Australia in 2004. He became an Australian tax resident on 7 July 2004 and remained resident from that time.

In the 2019–20 income year, a complying superannuation fund established for Mr Came in Australia received roll-over amounts totalling around $1.35 million rand sourced from five funds that were accepted to be ‘foreign superannuation funds’ for the purposes of sub-div 305‑B of the ITAA 1997.

The transfers were made indirectly from the foreign funds to a bank account in the name of Mr Came before being transferred to his Australian fund. This was due to South African law that required outbound transfers to be first cleared via an ‘Emigrant Capital Account’ (ECA) that was subject to exchange control regulation and other restrictions overseen by the South African government.

Accordingly, the relevant amounts rolled out from the five foreign superannuation funds (net of withholding tax) were initially deposited into an ECA held in Mr Came’s personal name, before they were ultimately transferred to Mr Came’s Australian superannuation fund. Further, it was not in dispute that Mr Came transferred each lump sum to his Australian fund ‘as directly as he could in the circumstances’, including with regard to Mr Came:

• depositing additional funds to his ECA to deal with known costs so as to keep each lump sum amount whole and intact;
• making no other interim use of the funds; and
• transferring the entirety of each lump sum promptly.

Mr Came subsequently made elections under s 305‑80(2) of the ITAA 1977 to have the assessable component of each transfer (technically known as ‘applicable fund earnings’ (AFE)) taxed to his Australian fund.

In broad terms, AFE typically represents the growth in a foreign fund post Australian tax residency as calculated under s 305‑75 of the ITAA 1997.

By default AFE is assessed personally to an individual taxpayer and subject to adult marginal tax rates, where a transfer does not take place within six months of the taxpayer becoming resident or ceasing foreign employment (see s 305‑70 of the ITAA 1997). Thus, a valid election made under s 305‑80(2) of the ITAA 1977 will generally result in less tax being paid on a foreign superannuation fund transfer as a result of the AFE amount being taxed at a maximum rate of 15%.

The Commissioner’s view

The ATO contended that a valid election under s 305‑80(2) of the ITAA 1997 was only available where the relevant foreign superannuation fund transfer was made directly to an Australian superannuation fund.

The ATO rejected Mr Came’s submission that s 307-15 of the ITAA 1997 (which contains deeming rules that apply to payments made for the taxpayer’s benefit or at their direction) applied in these circumstances.

Accordingly, due to the relevant transfers in this case being made indirectly via the ECA, the ATO sought to include the AFE amounts in Mr Came’s personal assessable income for the 2019–20 income year.

In support of this contention, the ATO submitted that under the previous legislation (see former s 27CAA of the Income Tax Assessment Act 1936 (Cth)), the equivalent election was expressly not available where a superannuation lump sum was paid indirectly. In the ATO’s view, the provisions in sub-div 305‑B of the ITAA 1997 which applied from 1 July 2007 maintained this position, albeit using simpler terminology.

The ATO considered it was irrelevant that Mr Came was not permitted under South African law to make direct transfers from the foreign superannuation funds to his Australian superannuation fund.

The decision

The AAT decided in favour of Mr Came. The Tribunal agreed with Mr Came that the provisions in s 305-80 which replaced s 27CAA were ‘substantive’ and ‘not merely stylistic’ and showed ‘a legislative intention to bring about a change’ in the law.

The AAT held that the provisions of sub-div 305‑B of the ITAA 1997 envisaged that ‘there may be a receipt followed by a payment of the whole amount’ into the Australian fund. Further, if the legislature had truly intended to replicate the direct transfer requirement in s 305‑80 ‘it could have simply stated that as a requirement’.

Implications

Notwithstanding the taxpayer’s win in this decision, we strongly recommend that a roll-over of money from a foreign superannuation fund to an Australian superannuation fund should be implemented via a direct transfer only.

In particular, we note that until such time as there is further case law addressing this issue and/or updated guidance from the Commissioner on their administrative approach to s 305‑80 of the ITAA 1997, a prudent course would be to avoid using holding accounts and any other intermediary steps in relation to foreign superannuation fund transfers to an Australian fund.

Conclusions

The decision in Came and Commissioner of Taxation shows the complexities and difficulties that can arise where a taxpayer is seeking to make a valid election under s 305‑80 of the ITAA 1997 in relation to the AFE component being assessed to an Australian fund.

The provision in sub-div 305‑B of the ITAA 1997 are notoriously complex and expert advice should be sought where a taxpayer seeks to repatriate money from an overseas fund.

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• Ensure an SMSF meets the residency tests
• International issues facing SMSFs today
• Transferring foreign superannuation fund amounts to an Australian resident

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By William Fettes ([email protected]), Senior Associate, and Daniel Butler ([email protected]), Director, DBA Lawyers

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

3 April 2024