Edited version of your written advice

Authorisation Number: 1051218701326

Date of advice: 28 April 2017

Ruling

Subject: Lump sum transfer from foreign super fund

Question 1

Is the retirement product established in Country A Pension Scheme a 'foreign superannuation scheme' under subsection 305-55(2) of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Is any part of the lump sum payment from Country A Pension Scheme included in assessable income as applicable fund earnings?

Answer

Yes

Question 3

Can the taxpayer make an election under section 305-80 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of transfers from Country A Pension Scheme?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 201Y

The scheme commences on:

1 July 201X

Relevant facts and circumstances

1. The Taxpayer arrived in Australian from Country A on the DDMMYY and has been an Australian resident for tax purposes since that date (the Residency Date).

2. While living in Country A, The Taxpayer became a member of a market-linked accumulation pension fund (the Country A Pension Scheme) established and controlled in Country A.

3. In early 201X, the Taxpayer transferred the entirety of their benefits from the Country A Pension Scheme to the Australian Fund.

4. The exchange rate published on the ATO website that applied on the date of receipt.

5. The Taxpayer has not been able to obtain the value of their benefits on DDMMYY (the day before Residency Date) in the Country A Pension Scheme and has asked the Australian Tax Office for an estimate of the value.

6. There were no contributions or pension amalgamations made to Country A Pension Scheme made by or in respect of The Taxpayer after they became a resident of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

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 section 305-80

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

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

Income Tax Assessment Act 1997 subsection 960-50(6)

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

Reasons for decision

Summary

7. The portion of the lump sum payment transferred by the Taxpayer from Country A Pension Scheme to the Australian Fund that should be included as assessable 'applicable fund earnings' in the Taxpayer's income tax return for the 201X-1Y income year is $XXXX

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

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

9. Typically, when a taxpayer transfers an amount from a foreign superannuation fund to Australia, the growth they earned on their foreign superannuation during the period when they were a resident of Australia must be included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997. If the Taxpayer became a member of the foreign superannuation fund before they became a resident of Australia, the amount of growth, or 'applicable fund earnings' is calculated under 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 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).

10. The effect of subsection 305-75(2) of the ITAA 1997 is that The Taxpayer is assessed only on the income they earned on their benefits in the Country A Pension Scheme. Any amounts attributable to contributions made by The Taxpayer and amounts attributable to transfers from other foreign funds do not form part of the taxable amount when the overseas benefit is paid.

Foreign currency conversion

11. 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.

12. 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, in considering Item 11A of the table in subsection 960-50(6) of the ITAA 1997, determined that the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsection 305-75(3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Transfer of a lump sum from a foreign superannuation fund to an Australian superannuation fund made after six months of residency

13. In accordance with section 305-70 of the ITAA 1997, if a transfer is not completed within six months of the taxpayer's residency date, any growth they earned on their foreign superannuation in the period in which the taxpayer was a resident must be included on their income tax return as 'applicable fund earnings.'

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

15. Therefore, the 'applicable fund earnings' amount in respect of the lump sum payment transferred from the Country A Pension Scheme that should be included in The Taxpayer's assessable income for the 201X-1Y income year is $XXXX

Election

16. According to section 305-80 of the ITAA 1997, a taxpayer who is transferring their overseas superannuation benefits directly to an Australian complying superannuation fund is able to elect to have the Australian superannuation fund pay the tax on the applicable fund earnings if the taxpayer no longer has an interest in the overseas fund immediately after the payment.

17. As The Taxpayer no longer has an interest in the Country A Pension Scheme, they are eligible to make the election in relation to the lump sum transfer.

18. If an election is made, the elected amount will be assessable to the Superannuation fund and subject to tax at 15% rather than being assessable to The Taxpayer and subject to tax at the Taxpayer's marginal tax rate.

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