Edited version of your written advice

Authorisation Number: 1012993975089

Date of advice: 5 May 2016

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the lump sum benefit received by a person from their Locked-in Retirement Account assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A person (Your Client) became a resident of Australia for tax purposes on a date in the relevant income year (the Residency Date).

Your Client was a member of a pension fund in an overseas country.

During the previous income year, Your Client's benefits were transferred from the pension fund in the overseas country to a Locked-in Retirement Account (LIRA) in the overseas country.

You are unable to advise the value of the benefit in the LIRA that was vested in Your Client on the day before the Residency Date.

You accept that the estimated value of Your Client's interest in the LIRA on the day before the Residency Date is an amount calculated by the ATO.

On a date in the relevant income year (the Receipt Date), Your Client received a lump sum payment of an amount from the LIRA.

The transferred lump sum represents all of Your Client's interest in the LIRA.

Your Client has not made any contributions nor have there been any pension amalgamations to the LIRA since Your Client migrated to Australia.

The LIRA is considered to be a superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

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 960-50

Reasons for decision

Summary

The 'applicable fund earnings' amount in respect of the lump sum payment from the LIRA is $0.00.

Consequently, no amount of the lump sum payment from the LIRA will be included in Your Client's assessable income in the relevant income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Where a person receives a superannuation lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in respect of the lump sum in their assessable income.

The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

Applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

Your Client became a resident of Australia for tax purposes on dd/mm/yyyy and received a lump sum benefit from the LIRA on dd/mm/yyyy. As this was more than six months after Your Client became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in respect of the payment in their assessable income for the relevant income year.

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As mentioned earlier, 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.

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 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 income 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).

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1

The effect of section 305-75 of the ITAA 1997 is that Your Client is assessed only on the income they earned on the benefits in the LIRA less any contributions they made since they became a resident of Australia. Any earnings made during periods of non-residency, and transfers into the LIRA do not form part of the taxable amount when the 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 (A$).

The applicable fund earnings amount 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.

The Commissioner's view on the application of this subsection in relation to section 305-75 of the ITAA 1997 is expressed in the 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 which states that each amount in a foreign currency that is an element in the calculation is to be translated to Australian dollars at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Amounts to be used in calculation

The amount in the LIRA vested in Your Client on the day before the Residency Date is converted into Australian dollars at the exchange rate that applied on the Date of Receipt of the relevant lump sum.

From the facts provided, no contributions or transfers have been made into the LIRA by, or on behalf of, Your Client since they became a resident of Australia.

During the relevant income year, a lump sum benefit was paid into Your Client's account. This is converted into Australian dollars at the exchange rate that applied on the Date of Receipt.

'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 for tax purposes and ceases on the day the lump sum is paid. Your Client was a resident for tax purposes 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 LIRA

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

This total is then subtracted from the amount determined under paragraph 305-75(3)(b) of the ITAA 1997.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997.

To this figure we add the amount determined under paragraph 305-75(3)(d) of the ITAA 1997:

As the result in this case is less than zero, no amount of the lump sum payment from the LIRA will be included as assessable 'applicable fund earnings' in Your Client's income tax return for the relevant income year.