Edited version of private ruling

Authorisation Number: 1011770383095

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Ruling

Subject: Foreign lump sum payment

Question

In calculating the 'applicable fund earnings' of a lump sum payment from a foreign superannuation fund, at what time are amounts translated into Australian dollars?

Answer

The 'applicable fund earnings' amount is calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

Your client became a resident of Australia for income tax purposes in a specific date (the residency day) in the 2007-08 income year.

Your client was a member of a foreign superannuation fund (the Fund).

The value of your client's benefits at the residency day was X amount of dollars.

In the first quarter of the 2010-11 income year, a lump sum benefit of Y amount of dollars was transferred to an Australian complying superannuation fund.

You advised that your client obtained the exchange rate from an investment institution.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 995-1(1)
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 Subsection 305-75(2).
Income Tax Assessment Act 1997 Subsection 305-75(3).
Income Tax Assessment Act 1997 Section 305-60.
Income Tax Assessment Act 1997 Paragraph 305-80.
Income Tax Assessment Act 1997 Subsection 960-50(1).
Income Tax Assessment Act 1997 Subsection 960-50(4).
Income Tax Assessment Act 1997 Subsection 960-50(6).

Reasons for decision

Summary of decision

A portion of a lump sum payment transferred to an Australian superannuation fund from a foreign superannuation fund may be assessable as 'applicable fund earnings'. The applicable fund earnings amount is calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt into Australian dollars (AUD), and deducting from this amount the AUD equivalent of the amount vested in the foreign fund on the day before your client first became an Australian resident at the exchange rate applicable on that day.

Because the applicable fund earnings in your client's case is nil, the entire payment is not assessable income or is not exempt income.

Consequently, your client does not need to decide if she wants her Australian superannuation fund to pay the income tax in respect of her foreign lump sum payment as there is no assessable amount.

Detailed reasoning

Lump sum payments from foreign superannuation funds

From 1 July 2007 the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received more than six months after a person has become an Australian resident will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The applicable fund earnings amount is subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

In this case your client, who previously resided in a foreign country, became a resident of Australia for taxation purposes on the residency day. Your client is a member of a foreign superannuation fund (the Fund) established in overseas and transferred the benefits in the Fund to an Australian superannuation fund more than six months after your client became a resident of Australia.

Therefore the applicable fund earnings calculated under subsection 305-75(3) of the ITAA 1997 in relation to the transfer of the superannuation benefits from the Fund will be assessable under section 305-70 in the relevant year of income that the transfer occurs.

Assessable Amount

As noted above, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a person's assessable income where the payment is received more than six months after becoming an Australian resident.

The lump sum benefit was transferred to an Australian superannuation fund more than six months after your client became an Australian resident. Consequently, the exemption under section 305-60 of the ITAA 1997 will not apply. Therefore, a portion of the lump sum payment will be assessable under subsection 305-75(3).

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 (but before you received it) 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 remainder of 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).

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 (AUD). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

(a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

(b) then, calculate the other amounts

The table to subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your client case:

· item 11 which deals with a receipt or payment to which none of the other items apply, and

· item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The payment your client finally receives is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into AUD at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in your client just before your client becoming a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts, other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into AUD at an exchange rate that is reasonable having regard to the circumstances.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by:

· translating the lump sum benefit received from the Fund at the exchange rate applicable on the day of receipt to AUD (item 11 of the table in subsection 960-50(6)); and

· deducting from this amount the AUD equivalent of the lump sum benefit vested in the Fund at the exchange rate applicable just before the residency date (item 11A of the table in subsection 960-50(6)).

Election

It is noted that your client was intending to choose to have the Australian superannuation fund include her applicable fund earnings in its assessable income, rather than pay tax on it herself. However, as determined above, the applicable fund earnings relating to your client's foreign lump sum payment is nil which means none of this lump sum needs to be included in assessable income under subsection 305-70(2) of the ITAA 1997.

Consequently, your client does not need to decide if she wants her Australian superannuation fund to pay the income tax in respect of her foreign lump sum payment as there is no assessable amount.