Edited version of private advice

Authorisation Number: 1051998617376

Date of advice: 27 June 2022

Ruling

Subject: Lump sum transfer from a foreign superannuation fund

Question 1

Will final payments from the two United Kingdom schemes (UK schemes) be taxed in Australia as lump sum payments pursuant to section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the applicable fund earnings on the interim payment from the UK schemes equal to the lump sum amount according to subsection 305-70(2) of the ITAA 1997?

Answer

Yes.

Question 3

Is the start dates for applicable fund earnings calculations under section 305-75, for the final payments, the day after the interim payment was made from the respective UK schemes?

Answer

Yes.

Question 4

Is any part of a future final payments from the UK schemes applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

Decline to rule.

This ruling applies for the following period

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

1.      The Taxpayer was born in Australia but worked overseas.

2.      The Taxpayer became a resident of Australia for tax purposes in the 20XX-XX income year.

3.      The Taxpayer held benefits in two UK schemes (Funds 1 and 2).

4.      The Taxpayer's benefit was transferred from another foreign pension scheme to the Fund 1 after he became a resident of Australia.

5.      In the 20XX-XX income year, an amount in the Fund 2 was transferred to a self-managed superannuation fund.

6.      In the 20XX-XX income year an interim payment was transferred from the Fund 1 to the Taxpayer as an income payment.

7.      In the 20XX-XX income year an interim payment was transferred from the Fund 2 to the Taxpayer.

8.      The Taxpayer is considering transferring their entire benefit in Funds 1 and 2 to Australia as final payments.

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 305-80

Taxation Administration Act 1953 section 357-110

Other relevant documents

ATO Interpretative Decision ATO ID 2015/7: Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997.

Reasons for decision

Summary

Final payments from the UK schemes are taxed in Australia as lump sum payments pursuant to section 305-70 of the ITAA 1997.

Under section 305-75 of the ITAA 1997, applicable fund earnings on the interim payments from Fund 1 and 2 is equal to the lump sum payment amount.

The start date for the applicable fund earnings calculation under section 305-75 is the day after the interim lump sum payment was made from the Funds.

The Commissioner declines to rule on whether any part of a future lump sum payments from the Funds are applicable fund earnings under section 305-75 of the ITAA 1997.

Detailed reasoning

If 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, Funds 1 and 2 are foreign superannuation funds. The Taxpayer became an Australian resident before the start of the period to which the lump sum from the Fund 1 relates. The Taxpayer remained an Australian resident at all times until the lump sum was paid. Therefore, the applicable fund earnings are calculated in accordance with subsection 305-75(2) of the ITAA 1997.

The Taxpayer became an Australian resident after the start of the period to which the lump sum from the Fund 2 relates. The Taxpayer remained an Australian resident at all times until the lump sum was paid. 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.

Subsection 305-70(2) of the ITAA 1997 states that only so much of the lump sum as equals the applicable fund earnings is included in assessable income. Therefore, the assessable income will be limited to the amount of the lump sum in any case where the lump sum is less than the applicable fund earnings.

Subsection 305-75(4) of the ITAA 1997 is relevant for calculating the applicable fund earnings where multiple lump sums have been paid to you from the same foreign fund. It states that:

If the lump sum is not the first lump sum from the fund you have received to which this section applies, for subsections (2) and (3) the start day is the day after you received the most recent such lump sum.

In this case, the final lump sum payments from the Funds will not be the first lump sum payments paid to the Taxpayer. Therefore subsection 305-75(4) will apply and the start date to be used in the calculation for applicable fund earnings of the final lump sum payment will be the day after the last lump sum payments were made.

The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in ATO Interpretative Decision ATO ID 2015/7: 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.

Transfer of interim payments from the Funds to Australia

The 'applicable fund earnings' amount in respect of the interim lump sum payments transferred from the Funds should be included in the Taxpayer's assessable income for the 2021-22 income year.

Decline to rule

Section 357-110 of schedule 1 to the Taxation Administration Act 1953 provides that a private ruling does not have to be given where the Commissioner considers that the correctness of the private ruling would depend on which assumptions were made about a future event or matter.

You are requesting a ruling in respect of events that will occur at an unknown time. It is unknown when the final payment of an amount from the Fund will be made.

In this case the Commissioner considers that the correctness of the private ruling would depend on assumptions made about a future event. The Commissioner declines to rule as the facts of your case are not known with reasonable certainty.

However, upon final payments of amounts from the Funds, calculations of 'applicable fund earnings' amounts are to be worked out under section 305-75 of the ITAA 1997.

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