Transfer from foreign superannuation fund to complying superannuation fund

Does the amount vested for the purposes of subparagraph 305-75(3)(a)(i) of the Income Tax Assessment Act 1997 (ITAA 1997) take into account an under-funding penalty that would have applied at the time the taxpayer became an Australian resident if the taxpayer had chosen to transfer their benefit to an eligible scheme at that time?

No. The amount vested for the purposes of subparagraph 305-75(3)(a)(i) of the ITAA 1997 is calculated without regard to the under-funding penalty that would have applied at the time the taxpayer became an Australian resident.

The taxpayer arrived in Australia from the United Kingdom (UK) in September 2004 and became an Australian resident for taxation purposes.

While in the UK, the taxpayer was a member of a UK 'final salary' superannuation fund (UK Fund), which is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Under the relevant UK law, the taxpayer was entitled to a cash equivalent transfer value (CETV) benefit before reaching the age of 65. The CETV amount could be taken as an alternative to a pension benefit provided that it was paid to another eligible scheme.

An amount of CETV was calculated soon after September 2004 at the taxpayer's request. As the UK fund did not have sufficient funds with which to meet its expected liabilities at that time (that is, it was under-funded), it advised that a reduced CETV amount would apply (an under-funding penalty) to any transfer at that time.

However, the taxpayer elected not to transfer his CETV benefit in 2004. Instead, the CETV benefit was transferred in September 2007. As at September 2007, the UK Fund had resolved its under-funding problem and, hence, there was no reduction of the CETV benefit actually transferred to Australia.

When a taxpayer receives a lump sum from a foreign superannuation fund more than 6 months after becoming a resident for income tax purposes but became a resident after the start of the period to which the lump sum relates, the part of the lump sum which relates to 'applicable fund earnings' is included in the taxpayer's assessable income and must be determined.

'Applicable fund earnings' for the purposes of section 305-70 of the ITAA 1997 are worked out under section 305-75 of the ITAA 1997. In particular, subparagraph 305-75(3)(a)(i) of the ITAA 1997 requires the amount in the fund that was vested in you just before the day you first became a resident to be determined.

The term 'vested' is not defined in Division 305 or in the ITAA 1997 more generally.

The Butterworths Australian Legal Dictionary has no definition for 'vested' but has definitions for related terms such as 'vest', 'vested in possession', 'vested interest' and 'vesting'.

The meaning given to the term 'vesting' relates solely to the superannuation context. It is defined as follows: A provision within an employer-sponsored superannuation fund, entitling a fund member to part or all of the employer's contributions which have been paid in on the member's behalf, upon leaving. This vesting occurs either immediately, after a specified number of years, or progressively over the years, increasing the size of a departure benefit. However, a resignation with full vesting often remains less than the benefit received on retirement, death or disablement.

Two meanings are given for the term 'vest'. One relates to the meaning for property law purposes. The other states: To effectively transfer legal ownership, rights or powers to another or place property in the possession or control of another; when a legal right or interest accrues to a person on the happening of the contingency or condition precedent to its vesting such as lapse of time or determination of a prior interest.

The ordinary meaning of the term 'vest' as found in the Macquarie Dictionary contains two meanings. Only the first of these two meanings can be seen to be relevant. That states: Settled or secured in the possession of a person or persons, as a complete or fixed right, an interest sometimes possessory, sometimes future, which has a substance because of its relative certainty.

The ordinary meaning of 'vested' accords with the meaning of 'vest' in the Australian Legal Dictionary which refers to a legal right or interest accruing. The amount vested in a person represents an amount to which the person is entitled or, put another way, an amount that has accrued to the person.

As at September 2004, the taxpayer had, in effect, three options available. • retain the deferred benefit and take the pension from the UK Fund at age 65; or • transfer the reduced CETV in September 2004; or • transfer an amount from the UK Fund at a later date.

As the transfer in September 2004 did not occur, it can only be seen as a notional set of circumstances. By staying with the UK Fund the taxpayer could take the pension benefit or transfer to an eligible scheme when the funding situation of the UK fund improved as in fact did occur. In view of that, the CETV in September 2004 without taking the under-funding penalty into account is the relevant amount and is the value of the best possible benefit available to the taxpayer at that time. The CETV can be seen as the amount 'derived' or that 'had accrued' at that point in time given that no amount was actually transferred at that time.

In view of the above the amount that is vested just before the taxpayer became an Australian resident in these circumstances is the amount of the CETV. The under-funding penalty is not taken into account.