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Edited version of your written advice
Authorisation Number: 1051243976768
Date of advice: 7 July 2017
Ruling
Subject: Applicable fund earnings
Question
Is any part of the payments 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?
Answer
Yes.
This ruling applies for the following periods:
Income year ended 30 June 20A3
Income year ended 30 June 20A4
The scheme commences on:
1 July 20A2
Relevant facts and circumstances
The Taxpayer arrived in Australia from a foreign country in 20A1 and has been an Australian resident for tax purposes since that date (the Residency Date).
The Taxpayer held interests in two foreign pension schemes: Fund A and Fund B.
The amounts vested in the Taxpayer in Fund A and Fund B on the day before the Residency Date was provided.
Subsequently, the Taxpayer opened a new foreign pension scheme, Fund C.
In the third quarter of 20A2, the Taxpayer transferred their entire interest in Fund A to Fund C (Payment 1).
The amount vested in the Taxpayer Fund A on the date of transfer was provided.
In the third quarter of 20A2, the Taxpayer transferred their entire interest in Fund B to Fund C (Payment 2).
The amount vested in the Taxpayer in Fund B on the date of transfer was provided.
The amount vested in the Taxpayer in Fund C immediately following the transfer was provided.
In the fourth quarter of 20A2, an amount of was transferred from Fund C into the Australian Fund, a complying superannuation fund in Australia (Payment 3).
Immediately before the transfer, the amount vested in the Taxpayer in Fund C was provided.
The amount vested in the Taxpayer in Fund C immediately after the transfer was provided.
In the third quarter of 20A3, an amount was transferred from Fund C into the Australian Fund (Payment 4).
Immediately before the transfer, the amount vested in the Taxpayer in Fund C was provided.
All three foreign schemes (Fund A, Fund B, Fund C) are pension schemes established and controlled in the foreign country.
All three foreign schemes are considered to be foreign superannuation funds.
The RBA exchange rates that applied on the relevant dates were used.
No amount for applicable fund earnings were reported in the 20A2-A3 and 20A3-A4 income year tax returns.
Relevant legislative provisions
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(2)
Income Tax Assessment Act 1997 Subsection 305-75(3)
Income Tax Assessment Act 1997 Subsection 995-1(1)
Income Tax Assessment Act 1997 Subsection 960-50(1)
Reasons for decision
Summary
The 'applicable fund earnings’ amounts in relation to the transfers from Fund C to the Australian Fund are to be included in the 20A2-A3 income year and 20A3-A4 income year.
These amounts must be included as applicable fund earnings in the Taxpayer’s assessable income for the 20A2-A3 and 20A3-A4 income years.
Detailed reasoning
Lump sum payments transferred from foreign superannuation funds
The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received more than six months after a person has become an Australian resident, will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997).
The applicable fund earnings amount is subject to tax at the person’s marginal tax rate. Portioning of the applicable fund earnings amount is not permitted. The remainder of the lump sum payment is not assessable income and is not exempt income.
The applicable fund earnings is worked out under either subsection 305-75(2) or 305-75(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.
The overall effect of section 305-75 of the ITAA 1997 is that the Taxpayer will be assessed on the sum of:
● the total growth earned on their benefits in a foreign superannuation fund during the period between the start day and the date when the lump sum is paid; and
● any previously exempt fund earnings.
An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is 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.
In this case, information available indicates that, Fund A, Fund B and Fund C are foreign superannuation funds.
Applicable fund earnings
The Taxpayer became a resident of Australia for tax purposes in 20A1. In 20A2, the Taxpayer made two lump sum payments between foreign superannuation funds.
In 20A2 and 20A3, the Taxpayer received lump sum payments in respect of their entitlements in Fund C. As these two payments were made more than six months after the Taxpayer became an Australian resident, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings’ in the their assessable income.
It is important to note, the growth in a foreign superannuation fund is not immediately included in a taxpayer’s assessable income if the lump sum transfer was from one foreign superannuation fund to another foreign superannuation fund. Transfers between foreign superannuation funds are excluded by subsection 305-70(4) of the ITAA 1997.
However, applicable fund earnings calculated under section 305-75 of the ITAA 1997 in relation to a later lump sum payment paid out of the foreign superannuation fund may include an amount of previously exempt fund earnings attributable to transfers between foreign superannuation funds.
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.
The Commissioner has considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that the exchange rate applicable at the time of receipt of the lump sum should be used to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date.
Conclusion
The 'applicable fund earnings’ amounts must be included in the Taxpayer’s assessable income for the 20A2-A3 income year and 20A3-A4 income year.
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