Edited version of private advice

Authorisation Number: 1051743045311

Date of advice: 15 September 2020

Ruling

Subject: Applicable fund earnings

Question

Is any part of the lump sum payment paid by the foreign fund assessable income 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 2020

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

The taxpayer became a resident of Australia for taxation purposes in the 2008-09 income year.

While living overseas, the taxpayer was a member of a foreign pension scheme (the foreign fund).

Under the rules of the foreign fund, the taxpayer was not able to access their pension other than at retirement.

The taxpayer was unable to provide the value vested in them at the date of residency.

The taxpayer agreed to the estimated value of their benefits vested in them at the date of residency.

There have been no contributions into the foreign fund since the taxpayer became an Australian resident for tax purposes.

There have been no transfers into the foreign fund since the taxpayer became an Australian resident for tax purposes.

There were no previously exempt fund earnings in relation to the lump sum.

The taxpayer's Australian superannuation fund received a lump sum payment from the foreign fund in the 2019-20 income year.

The taxpayer's Australian superannuation fund is a complying Australian superannuation fund and fully compliant registered scheme capable of receiving the foreign transfer.

The taxpayer no longer has an interest in the foreign fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Section 305-80

Reasons for decision

In accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997), where an individual taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, the taxpayer's assessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while the taxpayer was an Australian resident.

In this case, the foreign pension scheme is a foreign superannuation fund. The taxpayer became an Australian resident after the start of the period to which the lump sum relates. Therefore, the applicable fund earnings are calculated in accordance with subsection 305-75(3) of the ITAA 1997.

The effect of section 305-75 of the ITAA 1997 is that the individual taxpayer is only assessed on the income they earned on their benefits in the foreign fund while they were an Australian resident. Earnings during periods of non-residency, contributions and transfers into the foreign fund are not taxable when the overseas benefit is paid.

An amount of applicable fund earnings may also include amounts of previously exempt fund earnings which occur where an amount in a foreign super fund is transferred to another foreign super fund before being received in Australia. These earnings would not otherwise be included and are set aside until the lump sum is transferred to you, or your complying Australian super fund.

The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in ATO Interpretative Decision ATO ID 2015/7: Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997 (ATO ID 2015/7). We use the exchange rate that applied when the taxpayer received the lump sum, to work out the Australian dollar equivalent for the amount in the foreign superannuation fund that was vested in the taxpayer on a certain date.

The 'applicable fund earnings' amount has been calculated in accordance with subsection 305-75(3) of the ITAA 1997.

Election

Where a taxpayer transfers their overseas superannuation directly to a complying Australian superannuation fund more than six months after becoming a resident, they 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.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund.

If the taxpayer no longer has an interest in the paying fund (i.e. the foreign fund), they are eligible to make the election.

If the taxpayer qualifies for the election and submits an election notice, 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 their marginal tax rate.

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