Edited version of private advice

Authorisation Number: 1051676895830

Date of advice: 11 May 2020

Ruling

Subject: Lump sum payment from a foreign pension fund

Question

Is any part of the lump sum benefit paid from the Foreign Pension Plan assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

Your Client ceased employment overseas in the 20XX-XX income year and arrived in Australia in the same income year.

Your Client became a resident of Australia for tax purposes in the 20XX-XX income year.

While working overseas Your Client received superannuation contributions to the Foreign Pension Plan (the Plan), an employer sponsored fund.

Your Client joined the Plan in the 20XX-XX income year.

Under the rules of the Plan it provides benefits to be made to a member:

·         at Retirement Date (age 50),

·         as a result of the member's total and permanent disablement or

·         upon death.

You have provided the amount in the Plan vested in Your Client prior to them becoming an Australian resident for tax purpose.

You have provided the amount of member contributions Your Client made to the Plan prior to becoming an Australian resident.

You have provided the amount of employer contributions Your Client received to the Plan prior to become an Australian resident.

Since become an Australian resident Your Client has not made any contributions into the Plan.

No amounts have been transferred into the Plan from other foreign superannuation funds after Your Client became a resident of Australia.

Your Client intends to transfer the entire amount, in cash, in the Plan to themselves in the 20XX-XX income year.

A Member Valuation Statement from the Plan shows Your Client's latest account balance in the Plan.

Assumptions

You have agreed to an amount in the Plan vested in Your Client on the date before they became a resident of Australia.

You note that should the relevant amounts change (i.e. the lump sum actually received and/or exchange rate that applies on the date when the lump sum is received) then the applicable fund earnings will need to be recalculated.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 295-95(2).

Income Tax Assessment Act 1997 section 305-70.

Income Tax Assessment Act 1997 section 305-75.

Income Tax Assessment Act 1997 section 960-50.

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

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

Superannuation Industry (Supervision) Act 1993 section 10.

Superannuation Industry (Supervision) Act 1993 section 19.

Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision

Summary

A part of the lump sum benefit paid from the Plan is assessable as applicable fund earnings.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Section 305-70 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicablefund earnings' of the lump sum (if any) in their assessable income.

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 amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings amount is worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

The Plan as a 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) as a superannuation fund that is not an Australian superannuation fund.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a foreign superannuation fund. The fact that some of its members may be Australian residents would not necessarily alter this.

It is evident that the payer of the lump sum payment in respect of the Plan is established outside of Australia. Similarly, the central management and control is outside of Australia. Therefore the Plan established overseas is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Under the rules of the Plan it provides benefits to be made to a member:

·         at Retirement Date (age 50),

·         as a result of the member's total and permanent disablement or

·         upon death.

Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment to be received from the Plan is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your Client became a resident of Australia for tax purposes in the 20XX-XX income year and they intend to receive a lump sum payment from the Plan during the 20XX-XX income year. As this was more than six months after Your Client became an Australian resident, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in your client's assessable income for the relevant year.

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

Subsection 305-75(3) of the ITAA 1997 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 section 305-75 of the ITAA 1997 is that Your Client is assessed only on the income earned on her benefit in the Plan less any contributions she made since she became a resident of Australia. Any earnings made during periods of non-residency, and transfers into the paying fund 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 (A$). 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.

Consequently, the lump sum payment Your Client will receive is translated into Australian dollars at the exchange rate applicable at the time of receipt. Similarly, the amount vested in the Plan on the day before Your Client became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day. Therefore, for the purposes of section 305-70, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount in the Plan vested in Your Client just before the day she became an Australian resident, from the amount received from the Plan. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum.

Calculation of the applicable fund earnings amount -transfer from the Plan to Your Client

Your Client has yet to transfer their benefits from the Plan. Until that transfer takes place, we are unable to advise you of the actual figure to be included as assessable 'applicable fund earnings' in Your Client's tax return for the income year in which the transfer is made. However, we will show you how the applicable fund earnings are calculated by using the transfer value of Your Client's benefits in accordance with the latest statement from the Plan. Please note that should the relevant amounts change (i.e. the lump sum actually received and/or exchange rate that applies on the date when the lump sum is received) then the applicable fund earnings will need to be recalculated.

The 'applicable fund earnings' amount in respect of the lump sum payment transferred from the Plan that should be included in Your Client's assessable income for the 20XX-XX income year.

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