Edited version of your written advice

Authorisation Number: 1012876345865

Date of advice: 22 September 2015

Ruling

Subject: Lump sum transfer from a foreign superannuation fund

Question

For the purposes of subsection 305-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997), what is the estimated value of the taxpayer's interest in their overseas pension scheme on the day immediately before the date on which they arrived in Australia?

Answer

The estimated value of the taxpayer's interest in their overseas pension scheme on the day immediately before the date on which they arrived in Australia was provided to the taxpayer.

This ruling applies for the following period:

Income year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The taxpayer arrived in Australia from an overseas country during the relevant income year and has been an Australian resident for tax purposes since that date (the Residency Date).

The taxpayer held an interest in an overseas pension scheme, which was established and controlled in an overseas country.

The taxpayer provided evidence to indicate that the overseas pension scheme is a foreign superannuation fund.

The taxpayer is unable to provide the total value of their interest in the overseas pension scheme on the day before the Residency Date.

The taxpayer was able to provide the total value of their interest in the overseas pension scheme on a day in the 2014-15 income year.

There have been no contributions or pension amalgamations to the overseas pension scheme since the taxpayer migrated to Australia. The taxpayer does not intend to contribute to the overseas pension scheme or transfer amounts from other foreign superannuation funds to the overseas pension scheme in the 2015-16 income year.

The taxpayer intends to transfer the entirety of their interest in the overseas pension scheme during the 2015-16 income year to a complying Australian superannuation fund.

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

Income Tax Assessment Act 1997 section 960-50

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

Reasons for decision

Summary

The estimated value of the taxpayer's interest in the overseas pension scheme on the day immediately before the date on which they arrived in Australia was provided to the taxpayer.

This amount was calculated by the Australian Taxation Office by using the known value of the taxpayer's interest during the 2014-15 income year and working backwards until the Residency Date.

Lump sum payments transferred from foreign superannuation funds

'Foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997.

Section 305-70 of the ITAA 1997 will apply if a taxpayer receives a superannuation lump sum payment more than six months after the Residency Date from a foreign superannuation fund.

In accordance with section 305-70 of the ITAA 1997, such a taxpayer will be required to include in their assessable income so much of the lump sum as equals their applicable fund earnings.

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. In situations where the taxpayer became a member of the foreign superannuation fund before they became a resident of Australia, the applicable fund earnings for the lump sum will be worked out in accordance with subsection 305-75(3) of the ITAA 1997, which 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 the taxpayer is assessed only on the income they earn on their benefits in the foreign superannuation fund during the period between the Residency Date and the date of transfer. Earnings made during periods of non-residency, contributions, and transfers into the foreign superannuation fund will 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. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 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.

In ATO Interpretative Decision ATO ID 2015/7, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of a lump sum transfer from a foreign superannuation fund to an Australian fund should be calculated by deducting the amount in the foreign superannuation fund on the day before the Residency Date from the amount in the foreign superannuation fund just before the transfer. Both amounts should be translated into Australian dollars using the exchange rate applicable on the date of the transfer.

As the taxpayer was not able to obtain the exact amount in the overseas pension scheme vested in the taxpayer on the day immediately before the Residency Date, an estimation of that amount was provided by the Australian Taxation Office.

The estimate was calculated by reducing the known value of the taxpayer's interest by various amounts linked to price indices and working backwards until the Residency Date. This is because the overseas country typically utilises these price indices to measure price increases influencing pension upgrades.

The taxpayer has agreed that the estimate provided by the Australian Taxation Office was a reasonable estimate of the value of their interest in the overseas pension scheme on the day before the Residency Date.