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Edited version of your written advice
Authorisation Number: 1051267641588
Date of advice: 25 August 2017
Ruling
Subject: Lump sum transfer from foreign superannuation fund
Question
Is any part of the lump sum payment from the Foreign Pension Scheme 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 period:
Income year ending 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
The Taxpayer became an Australian resident for tax purposes on the Residency Date and had no periods of non-residency since.
The Taxpayer became a member of a defined benefit scheme (the Foreign Pension Scheme) established and controlled in the Foreign Country.
Benefits cannot be accessed from the Foreign Pension Scheme other than at retirement.
No contributions or transfers were made into the Foreign Pension Scheme since the Residency Date.
The Taxpayer transferred the entirety of their benefit from the Foreign Pension Scheme into an Australian Fund, a complying superannuation fund (Australian Fund).
The Commissioner considers the estimate obtained using Foreign CPI/RPI data to calculate the historical value of the benefit the day before Residency Date to be acceptable.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 305-70
Income Tax Assessment Act 1997 section 305-75
Income Tax Assessment Act 1997 section 305-80
Income Tax Assessment Act 1997 section 960-50
Detailed reasoning
Lump sum payments transferred from foreign superannuation funds
Section 305-70 provides that a lump sum from a foreign superannuation fund received 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.
The Foreign Pension Scheme is considered a 'foreign superannuation fund’.
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’ is worked out under subsection 305-75(2) where the person was an Australian resident at all times during the period to which the lump sum relates.
Applicable fund earnings
Subsection 305-75(2) of the ITAA 1997 states:
If you were an Australian resident at all times during the period to which the lump sum relates, the amount of your applicable fund earnings is the amount worked out as follows:
(a) work out the total of the following amounts:
(i) the part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund;
(ii) the part of the lump sum (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 income tax);
(c) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).
Foreign currency conversion
For the purposes of section 305-70 of the ITAA, the 'applicable fund earnings’ should be calculated by:
● translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars; and
● deducting from this amount, the amount vested in the foreign fund just before the day your client first became an Australian resident at the exchange rate applicable on the day of receipt of the lump sum.
Calculation of the applicable fund earnings amount
The value of the Taxpayer’s benefits in the Foreign Pension Scheme on the day before the Residency Date is agreed to be an amount estimated using CPI/RPI. This was converted into Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum.
Item |
Description |
Amount in X |
Amount in A$ |
A |
Amount in the Foreign Pension Scheme vested in the Taxpayer on the day before the Residency Date |
X |
$X |
B |
Part of the lump sum attributable to contributions to the Foreign Pension Scheme during the remainder of the period |
Nil |
Nil |
C |
Part of the lump sum attributable to amounts transferred into Foreign Pension Fund from any other foreign funds superannuation funds during the remainder of the period |
Nil |
Nil |
D |
A + B + C |
$X | |
E |
Amount in the Foreign Pension Scheme vested in the Taxpayer when the lump sum was paid |
Y |
$Y |
F |
E - D |
$Y-X | |
G |
Previously exempt fund earnings (if any) |
Nil |
Nil |
H |
F + G = Applicable Fund Earnings |
$Y-X |
Therefore, an amount of the lump sum payment transferred from the Foreign Pension Scheme to the Australian superannuation fund will be included as assessable 'applicable fund earnings’ in the Taxpayer’s tax return.
Election
A taxpayer who transfers a lump sum from a foreign superannuation fund to a complying superannuation fund may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the 'applicable fund earnings’ included as assessable income of the complying superannuation fund.
As the Taxpayer no longer has an interest in Foreign pension fund they will be eligible to make the election to have the 'applicable fund earnings’ included as assessable income of the Australian Fund.
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