Edited version of private advice

Authorisation Number: 1051529962031

Date of advice: 21 June 2019

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the lump sum payment received by you 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 ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You migrated to Australia and became a resident of Australia for taxation purposes on the residency date.

While living overseas, you became a member of the foreign fund.

The foreign fund meets the definition of a foreign superannuation fund.

There were no contributions or pension amalgamations to the foreign fund while you were a resident of Australia.

You received payments from the foreign fund as follows:

·       lump sum payment, representing a portion of the interest in this foreign fund; and

·       a pension commencing at the same time with the remaining interest.

You provided the value of your interest in the foreign fund as at the day before residency date.

You provided the value of your interest in the foreign fund as at the receipt date of the lump sum.

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 960-50

Reasons for decision

Summary

The applicable fund earnings in respect of the lump sum payment from the foreign fund should be included in your assessable income for the 2018-19 income year.

Detailed reasoning

Lump sum payments from foreign superannuation funds

The tax treatment of lump sums received from certain foreign superannuation funds is set out in Subdivision 305-B of the ITAA 1997.

If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable income.

In this case, based on the information provided, the foreign pension scheme is considered to be foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

As you received the lump sum payment more than six months after the date of residency, section 305-70 of the ITAA 1997 applies to the lump sum to include the amount of applicable fund earnings, in respect of the lump, in the your assessable income for the 2018-19 income year.

Applicable fund earnings

As you became a resident of Australia after the start of the period to which the lump sum relates, the applicable fund earnings are worked out under subsection 305-75(3) of the ITAA 1997.

Subsection 305-75(3) states:

If you become an Australian resident after the start 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 following amounts:

(i)               The amount in the fund that 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 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).

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

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) states that when applying section 960-50 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 the circumstances of this case, the Commissioner considers that each amount in a foreign currency that is an element in the calculation of the applicable fund earnings is to be translated to Australian Dollars at the exchange rate applicable at the time of receipt of the lump sum.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the applicable fund earnings amount in respect of the lump sum received from the foreign fund should be calculated by deducting the Australian dollar equivalent of the amount vested in you just before the residency date from the amount vested in you on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt.

Commencing pension at same time

When you commence a pension from the foreign fund at the same time as the payment of the lump sum, the Commissioner considers that subsection 305-75(3) of the ITAA 1997 is applied having regard only to the lump sum entitlement. That is, regard is had only to so much of each of the relevant vested amounts that was, at the relevant times, payable as a lump sum. The part of the vested amount that relates to the pension is disregarded.

This approach ensures that the individual is not assessed on earnings that have, in effect, accrued in relation to the pension that will be paid from the foreign superannuation fund. This is consistent with the Commissioner's view in ATOID 2012/49.

As you received a lump sum amount that is portion of your interest in the foreign fund, this percentage will be used to calculate the applicable fund earnings in relation to this lump sum amount received.

Calculation of the applicable fund earnings amount

The calculation of applicable fund earnings for the lump sum received from the foreign fund is shown in the table supplied with reference to the facts of the case. As discussed above, any amounts in XY are translated into Australian dollars using the exchange rate applicable on the day of receipt.

Further, a proportionate approach is applied as a pension commenced at the same time as the receipt of the lump sum.

Your applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 in respect of the lump sum payment from the foreign fund is $[amount].

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