Edited version of private advice

Authorisation Number: 1051411993153

Date of advice: 13 November 2018

Ruling

Subject: Applicable fund earnings on foreign lump sum payment

Question

Is any part of the Taxpayer's lump sum payment from an overseas 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:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On a date in the 19XX-XX income year, the Taxpayer became a member of an overseas pension scheme (the Fund).

On a date in the 19XX-XX income year, the Taxpayer became an Australian resident for tax purposes (the Residency Date).

The Taxpayer provided documentation in relation to the Fund which showed it was for the provision of retirement benefits and that benefits could not generally be withdrawn for pre-retirement purposes.

No contributions were made to the Fund after the Taxpayer became an Australian resident.

On a date in the 20XX-XX income year, the Taxpayer withdrew the entirety of their interest in the Fund and deposited it into their Australian bank account.

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 subsection 960-50(1)

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

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

Reasons for decision

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, the Taxpayer provided evidence to indicate that the overseas pension scheme (the Fund) is a superannuation fund as defined by the Act.

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. Ifthe 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).

The effect of subsection 305-75(3) of the ITAA 1997 is the Taxpayer is assessed only on the income they earned on their benefits in the Fund during the period in which they were a resident of Australia. 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

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.

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 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 payment from the Fund should be calculated by deducting the amount in the Fund on the day before the Residency Date from the amount in the Fund just before payment. Both amounts should be translated using the exchange rate applicable on the day of receipt.

Applicable fund earnings amount

The calculation for the applicable fund earnings for the lump sum that was received on the date in the 20XX-XX income year is shown in the table below. Any amounts in the foreign currency are translated into Australian dollars using the exchange rate applicable on the day of receipt.

Therefore, a portion of the lump sum payment transferred from the Fund to the Taxpayer's Australian bank account must be included as assessable 'applicable fund earnings' in the Taxpayer's income tax return for the 20XX-XX income year.

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