Edited version of private advice

Authorisation Number: 1012682505139

Ruling

Subject: Lump sum payment from a foreign fund

Question 1

Will any part of the remaining balance of a benefit in an overseas pension fund to be transferred to a superannuation fund in Australia be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will your client be entitled to choose under section 305-80 of the ITAA 1997 to include all or part of the applicable fund earnings (if any) in the assessable income of the Australian superannuation fund?

Answer

Yes.

This ruling applies for the following period:

The year ending 30 June 2015.

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

Prior to the 2014-15 income year your client became a resident of Australia and had an interest in a superannuation fund (Fund 1) which was established and held in an overseas country.

You have advised us of the value of Fund 1 as at the date of residency.

After your client became a resident of Australia, your client transferred benefits from Fund 1 to another overseas superannuation fund located in an overseas country (Fund 2).

You advised us of the value of your client's benefits in Fund 2 after the transfer from Fund 1.

Prior to the 2014-15 income year your client transferred an amount from Fund 2 to an Australian superannuation fund.

You advised us of the remaining amount vested in your client in Fund 1 after the transfer to Australia.

You advised us of the value of your client's benefits in Fund 2 after the transfer to Australia.

Your client is intending to transfer their remaining interest in Fund 2 to their Australian superannuation fund. This future transfer will result in a zero balance and cessation of Fund 2.

You advised that us the value of Fund 2 at a particular date in the 2014-15 income year and requested we use this figure when calculating the applicable fund earnings (if any) of Fund 2.

There have been no contributions to Fund 2 since your client migrated to Australia.

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 Subsection 305-70(1)

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 Subsection 305-75(5)

Income Tax Assessment Act 1997 Subsection 305-75(6)

Income Tax Assessment Act 1997 Subsection 305-80(1)

Income Tax Assessment Act 1997 Subsection 305-80(2)

Income Tax Assessment Act 1997 Subsection 960-50(1)

Income Tax Assessment Act 1997 Subsection 960-50(4)

Reasons for decision

Summary

A portion of the lump sum payment to be transferred from Fund 2 to a complying Australian Superannuation Fund will be included as assessable 'applicable fund earnings'.

As your client will no longer have an interest in Fund 2 after the transfer, they will be eligible to make an election to have these applicable fund earnings treated as assessable income of the Australian superannuation fund.

Detailed reasoning

Applicable fund earnings

Your client became a resident of Australia for tax purposes prior to the 2014-15 income year and is intending to transfer their remaining interest in Fund 2 during the 2014-15 income year. As this will be more than six months after they became an Australian resident, section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to include the 'applicable fund earnings' in your client's assessable income.

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. In your client's case, subsection 305-75(3) applies as your client became 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).

This means your client is assessed only on the income earned on the benefits in Fund 2 less any contributions your client made since becoming 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. For the purposes of section 305-70 of the ITAA, the 'applicable fund earnings' should be calculated by:

• translating the lump sum payment received from the overseas superannuation fund at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table to subsection 960-50(6)); and

• deducting from this amount the Australian dollar equivalent of the payment vested in the overseas superannuation fund at the exchange rate applicable on the day immediately before the residency date (item 11A of the table to subsection 960-50(6)).

Amounts to be used in calculation

Your client is yet to transfer the balance of their benefits from Fund 2. 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 2014-15 income year. However, we will show you how the applicable fund earnings are calculated using the figures you provided. Please note that should the relevant amounts change then the applicable fund earnings will need to be recalculated.

It should also be noted that whilst a person may make an overall loss in the fund throughout the course of multiple transfers, each transfer is a separate and distinct transaction occurring in separate and distinct income years. Accordingly, for the purpose of subsection 305-75(3) of the ITAA 1997, they are treated separately. The same treatment would occur even if the transactions were made within the same income year.

You have advised us what the value of your client's benefits in Fund 2 was after an earlier transfer was made from the Fund 2 to Australia in Australian dollars.

From the facts provided no contributions have been made to Fund 2 since your client migrated to Australia.

You advised us what the value of your client's benefits in Fund 2 was at a particular date in the 2014-15 income year.

'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In your client's case, they were a resident for the whole of this period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

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

Calculation of the assessable amount of the payment from the overseas pension scheme

In accordance with subsection 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b).

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c).

To this figure we add the amounts determined under paragraph 305-75(3)(d).

As the end result of this calculation is positive, a portion of the lump sum payment transferred from Fund 2 to your client's Australian superannuation fund will be included as assessable 'applicable fund earnings' in your client's tax return for the 2014-15 income year.

Election

A taxpayer who is transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have part of the payment treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as 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 the taxpayer's marginal rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997.

As your client will no longer have an interest in Fund 2 they will be eligible to make the election.

Conclusion

A portion of the lump sum payment your client intends to transfer from Fund 2 to a complying Australian superannuation fund will be included as assessable 'applicable fund earnings' in your client's tax return for the 2014-15 income year, if the transfer is made during that income year.

The exact amount will be dependent upon the value of the lump sum payment received and the date that it is made.

As your client will no longer have an interest in Fund 2 after the transfer is made your client is eligible to make an election to have the applicable fund earnings treated as assessable income of the Australian superannuation fund.