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Authorisation Number: 1013119030271

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Date of advice: 3 November 2016

Ruling

Subject: Lump sum payment from a foreign fund

Question

Is any part of the benefit received by the taxpayer from a foreign pension scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

The taxpayer arrived in Australia from an overseas country during the 19WW-XX income year and has been an Australian resident for tax purposes since that date (the Residency Date).

The taxpayer held an interest in a pension scheme established and controlled in the overseas country (Fund A).

The taxpayer provided evidence to indicate that Fund A is a foreign superannuation fund.

The taxpayer is unable to provide the total value of their interest in Fund A on the day before the Residency Date.

The taxpayer has agreed that the Australian Taxation Office estimate of the value of their interest in Fund A on the day before the Residency Date is accurate.

There have been no contributions or pension amalgamations to Fund A since the taxpayer migrated to Australia.

During the 20YY-ZZ income year, a portion of the taxpayer's total interest in Fund A was transferred into the taxpayer's superannuation account held in another pension scheme established and controlled in the overseas country (Fund B).

The taxpayer provided evidence to indicate that Fund B is also a foreign superannuation fund.

Soon after the transfer from Fund A to Fund B, the taxpayer transferred the remainder of their benefits in Fund A to a complying superannuation fund in Australia (the Australian Fund).

The taxpayer no longer has an interest in Fund A.

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(4)

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 subsection 305-75(3)

Income Tax Assessment Act 1997 paragraph 305-75(3)(a)

Income Tax Assessment Act 1997 paragraph 305-75(3)(b)

Income Tax Assessment Act 1997 paragraph 305-75(3)(c)

Income Tax Assessment Act 1997 subsection 305-75(4)

Income Tax Assessment Act 1997 subsection 305-75(5)

Income Tax Assessment Act 1997 section 960-50

Income Tax Assessment Act 1997 subsection 960-50(1)

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

Summary

The 'applicable fund earnings' amount which is worked out in relation to the transfer from Fund A to the Australian Fund is nil. As such, no part of the lump sum payment transferred by the taxpayer from Fund A to the Australian Fund will be included in the taxpayer's assessable income for the 20YY-ZZ income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

'Foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997. In this case, the taxpayer provided evidence to indicate that Fund A is a foreign superannuation fund as defined by the act.

Therefore, section 305-70 of the ITAA 1997 applies in this case as the superannuation lump sum was received more than six months after the Residency Date from a foreign superannuation fund.

In accordance with section 305-70 of the ITAA 1997, the taxpayer is required to include in their assessable income so much of the lump sum as equals their applicable fund earnings.

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As the taxpayer became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings are worked out in accordance with subsection 305-75(3) of the ITAA 1997 which 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 remainder of 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 income 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).

As the taxpayer received more than one lump sum payment from an overseas superannuation fund, subsection 305-75(4) of the ITAA 1997 will apply alongside subsection 305-75(3) of the ITAA 1997 in relation to any lump sum payments beyond the first. According to subsection 305-75(4) of the ITAA 1997:

(4) If the lump sum is not the first lump sum from the fund you have received to which this section applies, for subsections (2) and (3) the start day is the day after you received the most recent such lump sum.

The effect of section 305-75 of the ITAA 1997 is that the taxpayer is assessed only on the income they earned on their benefits in Fund A during the period between the start day and the date when the lump sum is paid. Any earnings made outside the period between the start day and the date when the lump sum is paid does not form part of the taxable amount when the overseas benefit is paid. Any amounts attributable to contributions made by the taxpayer or transfers from other foreign funds also do not form part of the taxable amount when the overseas benefit is 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. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 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.

In ATO Interpretative Decision ATO ID 2015/7, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of the lump sum transfer from Fund A to the Australia Fund should be calculated by deducting the amount in Fund A on the day before the start day from the amount in Fund A just before payment. Both amounts should be translated using the exchange rate applicable on the day of receipt.

Calculation of the applicable fund earnings amount

The calculation of the applicable fund earnings for the lump sum received from Fund A is shown in the table below with reference to the facts of the case. As discussed above, any amounts in a foreign currency are translated into Australian dollars using the exchange rate applicable on the day of receipt.

In this case, as the lump sum did not increase in value in the period between the start day and the date when the lump sum was paid (i.e. X = Y), the 'applicable fund earnings' amount in respect of the transfer from Fund A to the Australian Fund is nil. No part of the lump sum payment will need to be included in the taxpayer's assessable income for the 20YY-ZZ income year.

The Transfer from Fund A to Fund B

According to subsection 305-70(4) of the ITAA 1997:

(4) Any part of the lump sum that is paid into another foreign superannuation fund is not assessable income and is not exempt income.

As such, no part of the lump sum payment from Fund A to Fund B will need to be included in the taxpayer's assessable income for the 20YY-ZZ income year.

However, when the taxpayer's interest in Fund B is eventually transferred to the taxpayer at a later time, this later lump sum payment will include an amount of previously exempt fund earnings, which is defined under subsection 305-75(5) of the ITAA 1997:

(5)  You have an amount of previously exempt fund earnings in respect of the lump sum if:

(a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign income tax) is attributable to the amount; and

(b) the amount is attributable to a payment received from a foreign superannuation fund; and

(c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

In effect, the amount of previously exempt fund earnings in relation to the later transfer is equal to the amount earned in Fund A during the period between the Residency Date and the date on which the transfer from Fund A to Fund B occurred.

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