Edited version of your written advice

Authorisation Number: 1012994324222

Date of advice: 12 April 2016

Ruling

Subject: Lump sum transfer from a foreign superannuation fund - previously exempt fund earnings

Question

Is any part of a transfer from one overseas pension scheme to another overseas pension scheme 'previously exempt fund earnings' as defined by subsection 305-75(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

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 became an Australian resident for taxation purposes during the 200X-0X income year (the Residency Date).

The taxpayer has been an Australian resident since the Residency Date, except for a period of 2 years and 2 months where the Taxpayer was a resident of a foreign country.

The taxpayer was a member of an overseas pension scheme (Fund A), which is an overseas defined benefits pension scheme.

The taxpayer provided evidence to indicate that Fund A was a foreign superannuation fund.

During the relevant income year, the taxpayer transferred the entirety of their benefits in Fund A to a different overseas pension scheme (Fund B).

The funds in Fund B will eventually be transferred to Australia at a later date.

The taxpayer has not been able to obtain the value of his benefits on the day before the Residency Date in Fund A.

The taxpayer and the Australian Taxation Office (ATO) have agreed on an estimation methodology for calculating the value of the Taxpayer's benefits in Fund A on the day before the Residency Date. This methodology was based on the following:

• According to the rules of Fund A, a part of the taxpayer's annual pension is guaranteed to increase by 5% a year. The remainder of the taxpayer's annual pension will be increased by the lesser of 5% a year and the change in price inflation. The size of these parts is determined by the date on which the taxpayer joined the fund, how much of the annual pension is in excess of a certain threshold, and when the pension amounts were accrued.

• The taxpayer provided a copy of a statement of preserved benefits from Fund A which provided enough information to determine the size of each part.

• Calculating backwards from the known value of the taxpayer's interest in Fund A on the date on transfer in the relevant income year, it is possible to estimate the value of the taxpayer's interest in Fund A on the day before the Residency Date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 subsection 305-70(4)

Income Tax Assessment Act 1997 section 305-75

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 995-1(1)

Income Tax Assessment Act 1997 subsection 960-50(6)

Reasons for decision

Summary

A portion of the lump sum payment transferred by the taxpayer from Fund A to Fund B is 'previously exempt fund earnings.'

The amount of previously exempt fund earnings must be included in the calculation of the taxpayer's 'applicable fund earnings' under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997) when the funds in Fund B are eventually be transferred to Australia at a later date. For the purposes of the calculation, the amount of 'previously exempt fund earnings' must be converted into Australia dollars using the exchange rate on the date of the eventual transfer to Australia.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

'Foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997. In this case, the taxpayer provided evidence to indicate that Fund A is a foreign superannuation fund as defined by the act.

Typically, when a taxpayer transfers an amount from a foreign superannuation fund to Australia, the growth they earned on their foreign superannuation during the period when they were a resident of Australia must be included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997. If the taxpayer became a member of the foreign superannuation fund before they became a resident of Australia, the amount of growth, or 'applicable fund earnings' is calculated under 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).

Previously exempt fund earnings

However, the growth in a foreign superannuation fund is not immediately included in a taxpayer's assessable income if the lump sum transfer was from one foreign superannuation fund to another foreign superannuation fund. Transfers between foreign superannuation funds are excluded by subsection 305-70(4) of the ITAA 1997, which states that:

(4) Any part of the lump that is paid into another foreign superannuation fund is not assessable income and is not exempt income.

Instead, the amount of growth in the fund is set aside as future 'previously exempt fund earnings,' for when a lump sum is paid from a foreign superannuation fund to Australia in the future.

Subsection 305-75(5) defines previously exempt fund earnings as follows:

You have an amount of previously exempt fund earnings in respect of the lump sum if:

(a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and

(b) the amount is attributable to a payment received from a foreign superannuation fund; and

(c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

Subsection 305-75(6) states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

Transfer from Fund A to Fund B - Calculation of previously exempt fund earnings

As the transfer from Fund A to Fund B is a transfer between two foreign superannuation funds, the growth in Fund A will be set aside as future 'previously exempt fund earnings.' As the taxpayer became a member of Fund A before they became a resident of Australia, the growth in Fund A will be worked out in accordance with subsection 305-75(3) of the ITAA 1997, outlined above.

The calculation of the total growth in Fund A in accordance with subsection 305-75(3) of the ITAA 1997 is shown in the table below.

1. The result of the calculation above is the amount of future 'previously exempt fund earnings' that must be included in the calculation of the taxpayer's 'applicable fund earnings' under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997) when the funds in Fund B are eventually be transferred to Australia at a later date.

Foreign currency conversion

2. 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, in considering Item 11A of the table in subsection 960-50(6) of the ITAA 1997, determined that the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsection 305-75(3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

3. In other words, the amount of 'previously exempt fund earnings' must be converted into Australia dollars using the exchange rate on the date on which the taxpayer's superannuation monies are eventually transferred to Australia.