Edited version of private advice

Authorisation Number: 1051777008391

Date of advice: 18 November 2020

Ruling

Subject: Lump sum payment from a foreign pension fund

Question

Is any part of the lump sum benefit paid from the Transaction Personal Pension Plan assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer became an Australian resident for tax purposes in 20XX.

The Taxpayer was a member of the Transaction Personal Pension Plan (SIPP1) The account was established from a transfer from his defined benefit schemes.

The Taxpayer has been a member of SIPP1 since 19XX.

SIPP 1 is a Foreign pension scheme which does not allow for access of benefits prior to retirement age.

The following is a summary of the lump sum payments from SIPP1:

The amount vested in the Taxpayer in SIPP1 on the day before the start day for the relevant lump sum payments are as follows:

The Taxpayer has not made any contributions to SIPP1 since becoming an Australian resident for tax purposes.

No amounts have been transferred into the Scheme from other foreign superannuation funds after the Taxpayer became a resident of Australia.

The exchange rate published on the ATO website for **/**/**** was A$1 = xx

The exchange rate published on the ATO website for **/**/**** was A$1= xx

The exchange rate published on the ATO website for **/**/**** was A$1= xx

The exchange rate published on the ATO website for **/**/**** was A$1= xx

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 section 305-75.

Income Tax Assessment Act 1997 section 960-50.

Income Tax Assessment Act 1997 subsection 960-50(4).

Income Tax Assessment Act 1997 subsection 995-1(1).

Superannuation Industry (Supervision) Act 1993 section 10.

Superannuation Industry (Supervision) Act 1993 section 19.

Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision

Lump sum payments transferred from foreign superannuation funds

Section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum (if any) in their assessable income.

In accordance with subsection 305-70(2) of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 of the ITAA 1997 is included in the assessable income of a person.

The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings amount is 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.

SIPP1 as a 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as a superannuation fund that is not an Australian superannuation fund.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997, 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.

It is evident that the lump sum payment is made by SIPP1 which is established outside of Australia. Similarly, the central management and control of SIPP1 is outside of Australia. Therefore, SIPP1 established in the UK is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

SIPP1 does not allow for access of benefits prior to retirement age.

Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment the Taxpayer received from SIPP1 is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

The Taxpayer became a resident of Australia for tax purposes on 20XX and the lump sum payments from SIPP1 were transferred more than six months after the Taxpayer became an Australian resident. Therefore, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in the Taxpayer's assessable income for the relevant year.

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(3) of the ITAA 1997 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:

(a) work out the total of the following amounts:

(i) 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;

(ii) 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;

(iii) 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;

(b) 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);

(c) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

(d) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

The effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income earned on their benefits in SIPP1 less any contributions they made since they became a resident of Australia. Any earnings made during periods of non-residency, and transfers into SIPP1 do not form part of the taxable amount when the benefits are paid.

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 (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 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.

Consequently, the lump sum payment the Taxpayer received is translated into Australian dollars at the exchange rate applicable at the time of receipt. Similarly, the amount vested in SIPP1 on the day before the Taxpayer became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day. Therefore, for the purposes of section 305-70, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount in SIPP1 vested in the Taxpayer just before the day they became an Australian resident, from the amount received from SIPP1. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum.

Calculation of the applicable fund earnings amount - transfer from SIPP1 on **/**/****

The calculation of the applicable fund earnings amount in respect of the amounts transferred from SIPP1 to the Taxpayer on **/**/**** of xx is shown in the tables below. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = £xx

Therefore the 'applicable fund earnings' amount in respect of the lump sum payment of xx that should be included in the Taxpayer's assessable income for the 2018-19 income year is XX

However, subsection 305-70(2) of the ITAA 1997 states that only so much of the lump sum as equals the applicable fund earnings is included in assessable income. Therefore, the assessable income will be limited to the amount of the lump sum in any case where the lump sum is less than the applicable fund earnings.

Accordingly, the amount included as assessable income for this lump sum is xx which, using the rate of A$1 = £xx, converts to xx. This is the 'applicable fund earnings' that should be included in the Taxpayer's assessable income for the 20XX-XX income year.

Calculation of the applicable fund earnings amount - transfer from SIPP1 on **/**/****

The calculation of the applicable fund earnings amount in respect of the amounts transferred from SIPP1 to the Taxpayer on **/**/**** of xx is shown in the tables below. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = xx

Therefore the 'applicable fund earnings' amount in respect of the lump sum payment of xx that should be included in the Taxpayer's assessable income for the 2019-20 income year is xx.

Calculation of the applicable fund earnings amount - transfer from SIPP1 on **/**/****

The calculation of the applicable fund earnings amount in respect of the amounts transferred from SIPP1 to the Taxpayer on **/**/**** of xx is shown in the tables below. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = xx

Therefore the 'applicable fund earnings' amount in respect of the lump sum payment of xx transferred from SIPP1 that should be included in the Taxpayer's assessable income for the 2019-20 income year is xx.

Calculation of the applicable fund earnings amount - transfer from SIPP1 on **/**/****

The calculation of the applicable fund earnings amount in respect of the amounts transferred from SIPP1 to the Taxpayer on **/**/**** of xx is shown in the tables below. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = xx

Therefore the 'applicable fund earnings' amount in respect of the lump sum payment transferred from SIPP1 that should be included in the Taxpayer's assessable income for the 20XX-XX income year is xx.

However, subsection 305-70(2) of the ITAA 1997 states that only so much of the lump sum as equals the applicable fund earnings is included in assessable income. Therefore, the assessable income will be limited to the amount of the lump sum in any case where the lump sum is less than the applicable fund earnings.

Accordingly, the amount included as assessable income for this lump sum is xx which, using the rate of A$1 = xx converts to xx. This should be included in the Taxpayer's assessable income for the 20XX-XX income year.