Edited version of your written advice

Authorisation Number: 1051278761917

Date of advice: 5 September 2017

Ruling

Subject: Lump sum transfer from a foreign superannuation fund

Question

Is any part of a transfer from one overseas pension scheme to another overseas pension scheme 'previously exempt fund earnings' as defined by subsection 305-75(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Taxpayer arrived in Australia from a foreign country in 2011 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 foreign country (Foreign Pension Scheme 1).

The Taxpayer has not been able to obtain the value of their benefits in Foreign Pension Scheme 1 on the day before the Residency Date.

In 2015, the Taxpayer transferred the total amount of their benefits in Foreign Pension Scheme 1 to the a pension scheme established and controlled in a different foreign country (Foreign Pension Scheme 2)

The Taxpayer intends to transfer the benefits in Foreign Pension Scheme 2 to Australia.

The Taxpayer has made no contributions to either Foreign Pension Scheme 1 or Foreign Pension Scheme 2 since becoming a resident of Australia.

Foreign Pension Scheme 1 and Foreign Pension Scheme 2 are considered to be foreign superannuation funds for the purposes of Subdivision 305-B of the ITAA 1997.

The Taxpayer has estimated the amount in Foreign Pension Scheme 1 that was vested in the Taxpayer on the day before the Residency Date. This estimate was based on the following:

● The Taxpayer has advised that according to the rules of Foreign Pension Scheme 1, the Guaranteed Minimum Pension (GMP) component (both Pre 1988 and Post 1988) increased by 4% per year; while the amount in excess of the GMP (non GMP) increased with the foreign country Consumer Price Index (CPI).

● The Taxpayer’s pension value in Foreign Pension Scheme 1 at the date of transfer value calculation was a certain amount per annum and was comprised of the following components:

● Pre 1988 GMP

● Post 1988 GMP

● Non GMP (excess)

● Based on the above pension values, the percentage of each component was calculated and applied to the transfer value.

● The transfer value was then discounted at the appropriate rate (4% or Foreign Country CPI) on a component by component basis.

The Australian Taxation Office has agreed that this is an appropriate estimation methodology.

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(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 paragraph 305-75(3)(d)

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

Income Tax Assessment Act 1997 subsection 305-75(6)

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

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

Reasons for decision

Summary

The portion of the lump sum payment transferred by the Taxpayer from Foreign Pension Scheme 1 to Foreign Pension Scheme 2 that is ‘previously exempt fund earnings’ is the Australian dollar equivalent of a certain amount in foreign currency.

This amount of previously exempt fund earnings must be included in the calculation of the Taxpayer’s ‘applicable fund earnings’ under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997) when the funds in Foreign Pension Scheme 2 are transferred to Australia at a later date. For the purposes of the calculation, the amount of ‘previously exempt fund earnings’ must be converted into Australia dollars using the exchange rate on the date of the eventual transfer to Australia.

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, Foreign Pension Scheme 1 and Foreign Pension Scheme 2 are foreign superannuation funds as defined by the ITAA 1997.

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).

Previously exempt fund earnings

However, 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, which states that:

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

Instead, the amount of growth in the fund is set aside as future ‘previously exempt fund earnings,’ for when a lump sum is paid from a foreign superannuation fund to Australia in the future.

Subsection 305-75(5) defines previously exempt fund earnings as follows:

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 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.

Subsection 305-75(6) states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

Calculation of the applicable fund earnings amount

As the transfer from Foreign Pension Scheme 1 to Foreign Pension Scheme 2 is a transfer between two foreign superannuation funds, the growth in Foreign Pension Scheme 1 will be set aside as future ‘previously exempt fund earnings’. As the Taxpayer became a member of Foreign Pension Scheme 1 before they became a resident of Australia, the growth in Foreign Pension Scheme 1 will be worked out in accordance with subsection 305-75(3) of the ITAA 1997, outlined above.

The calculation of the total growth in Foreign Pension Scheme 1 in accordance with subsection 305-75(3) of the ITAA 1997 is shown in the table below.

Therefore, the future ‘previously exempt fund earnings’ of the payment transferred from Foreign Pension Scheme 1 to Foreign Pension Scheme 2 is calculated as a certain figure.

This amount of previously exempt fund earnings must be included in the calculation of the Taxpayer’s ‘applicable fund earnings’ under section 305-75 of the ITAA 1997 when the funds in Foreign Pension Scheme 2 are transferred to Australia at a later date.

Foreign currency conversion

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.

In other words, the amount of ‘previously exempt fund earnings’ must be converted into Australia dollars using the exchange rate on the date on which the Taxpayer’s superannuation monies are eventually transferred to Australia.

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