1051455371608 | Legal database

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Edited version of your written advice

Authorisation Number: 1051455371608

Date of advice: 12 December 2018

Ruling

Subject: Lump sum transfer from a foreign superannuation fund

Question

Is the lump sum payment received from your foreign fund to an Australian superannuation 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 period:

Income year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

1. The Taxpayer migrated to Australia as a Permanent Resident (the Residency Date).and has been an Australian resident for tax purposes since that date.

2. The Taxpayer held an interest in Fund A, a defined benefit pension scheme established and controlled in the UK.

3. The Taxpayer had a transfer value in Fund A on 31 March 2016.

4. The Taxpayer became a member of Fund B, which is a pension scheme established and controlled in the UK.

5. The Taxpayer’s benefits in Fund A were transferred to Fund B.

6. For the purposes of the Superannuation Industry (Supervision) Act 1993 (the SISA) and the ITAA 1997, Fund A and Fund B are deemed to be a foreign superannuation fund.

7. The Taxpayer no longer has any interest in Fund A.

8. The interest in Fund B was transferred to Fund C.

9. Fund C is an Australian super fund which is a fully compliant QRPOS registered scheme capable of receiving overseas pension transfers.

10. The Taxpayer requested the ATO provide a historical value of their benefits as the administrators for Fund A have been unable to provide the cash equivalent transfer values of interest in the funds on the day before the residency date.

11. The proposed estimation of the value of the Taxpayer’s benefits in Fund A would be calculated by discounting the amounts received by the relevant inflation rate for the defined benefits pensions.

12. You advised that the Taxpayer did not make any contributions nor make any transfers into Funds B and C from any other superannuation funds.

13. There were no periods of non-residency since the Residency Date for the Taxpayer.

14. The exchange rate published on the ATO website that applied on the transfer date were used.

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 Subsection 305-75(3)

Income Tax Assessment Act 1997 Subsection 305-75(2)

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

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

Income Tax Assessment Act 1997 Subsection 305-80(1)

Income Tax Assessment Act 1997 Subsection 305-80(2)

Income Tax Assessment Act 1997 Section 960-50

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 has provided evidence to indicate that the Fund A and Fund B are foreign superannuation funds as defined by the ITAA 1997.

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

The effect of subsection 305-75(3) of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the foreign fund. 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, 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.

Subsection 305-75(2) states that if you were an Australian resident at all times during the period to which the lump sum relates, the amount of your AFE is the amount (not less than zero) 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 (the start day);

(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);

Therefore, the ‘applicable fund earnings’ amount in respect of the lump sum payment transferred from Fund A and Fund B should be included in the Taxpayer’s assessable income.

Election

A taxpayer who is transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the applicable fund earnings treated as the assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included in the assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal tax rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1) of the ITAA 1997).

If the Taxpayer no longer has an interest in Fund B, they may be eligible to make the election.

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