Edited version of your written advice

Authorisation Number: 1051232551900

Date of advice: 5 June 2017

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the lump sum received by the Taxpayer from the Pension Fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Income year ending 20 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Taxpayer emigrated from Country X and became a resident for taxation purposes.

A few years later, the Taxpayer returned to Country X to live and work.

Several years later, the Taxpayer returned to Australia to live, once again becoming a resident for taxation purposes.

The Taxpayer became a member of Country X’s defined benefits pension fund (the Country X Fund) prior to their residency in Australia.

The Country X Fund is now administered by the Country X Pension Fund (the Pension Fund).

The Pension Fund is considered to be a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

The administrators of the Pension Fund are unable to provide the amount in the fund that was vested in the Taxpayer on the day before the Taxpayer became a resident for taxation purposes.

The Taxpayer was not able to access the funds in the Country X Fund or the Pension Fund until retirement.

There have been no contributions or transfers into the Country X Fund or the Pension Fund since the Taxpayer became a resident of Australia for taxation purposes.

Taxpayer received a lump sum payment from the Pension Fund.

The Taxpayer will continue to receive a regular pension payment from the Pension Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 section 305-60

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 995-1(1)

Reasons for decision

Summary

The 'applicable fund earnings’ amount in respect of the lump sum received by the Taxpayer from the Pension Fund is a specified amount.

Consequently, this specified amount of the lump sum received should be included in the Taxpayer’s assessable income for the 2016-17 income year.

Detailed reasoning

Tax treatment of lump sums received from certain foreign superannuation funds is set out in Subdivision 305-B of the ITAA 1997.

If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person’s assessable income.

The Taxpayer first became a resident of Australian for taxation purposes for several years. This period of residency ended when the Taxpayer returned to the Country X.

The Taxpayer became a resident of Australia for taxation purposes a second time and received a lump sum payment from the Pension Fund.

As the Taxpayer received the lump sum more than six months after their residency, section 305-70 of the ITAA 1997 applies to the lump sum received so that that the amount of applicable fund earnings (if any) in respect of the lump sum is included in the Taxpayer’s assessable income for the 2016-17 income year.

Applicable fund earnings

'Applicable fund earnings’ are worked out under section 305-75 of the ITAA 1997. In particular, subsection 305-75(3) of the ITAA 1997 is used to calculate applicable fund earnings where, as here, the Taxpayer became an Australian resident after the start period to which the lump sum relates.

Subsection 307-75(3) of the ITAA 1997 states:

If you become an Australian resident after the start 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 following amounts:

(i) The amount in the fund that 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 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).

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

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 the Pension Fund during the residency period. Earnings made during periods of non-residency, and contributions and transfers into the Pension Fund, do not form part of the taxable amount when the lump sum 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 (A$). 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 Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings’ under section 305-75 of the ITAA 1997, 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 received from the Pension Fund should be calculated by deducting the Australian dollar equivalent of the amount vested in the Taxpayer just before the residency date from the amount vested in the Taxpayer on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt.

Calculation of applicable fund earnings amount

As the Taxpayer is not able to obtain the value of benefits in the Foreign Fund vested in the Taxpayer on the day just before the day they became a resident, the Commissioner has estimated the amount.

'The period’ for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident for taxation purposes and ceases on the day on which the lump sum is paid. Therefore, the period to which this lump sum relates is the period from the first day of the first residency until the date the lump sum was paid. The Taxpayer was not a resident for the whole of this period. Therefore, the proportion of total days during the period in which the Taxpayer was resident is:

Days in first period + days in second period = 0.77

Total days

In accordance with subsection 305-75(3) of the ITAA 1997, the amounts determined at subparagraphs 305-75(3)(a)(i), (ii) and (iii) of the ITAA 1997 are added.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b) of the ITAA 1997.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997.

To this figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997.

The result of this calculation is the portion of the lump sum payment received from the Pension Fund that is the 'applicable fund earnings'.

Therefore, the 'applicable fund earnings’ amount in respect of the lump sum payment received by the Taxpayer from the Pension Fund that should be included in the Taxpayer’s assessable income for the 2015-16 income year is a specified amount.

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