Edited version of your written advice

Authorisation Number: 1051226866016

Date of advice: 18 May 2017

Ruling

Subject: Transfer from a foreign superannuation fund

Question 1

Is any part of the transfer from a foreign Defined Benefit Pension Plan to a Foreign Investment Pension Plan 'applicable fund earnings' as defined by section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the methodology used to calculate the 'previously exempt fund earnings' as defined by subsection 305-75(5) of the ITAA 1997 correct?

Answer

The answer to Question 1 also answers this question.

Question 3

If the 'applicable fund earnings' as calculated, were transferred from the Foreign Self Investment Pension Plan to a second Foreign Self Investment Pension Plan and then to an Australian Self-Managed Superannuation Fund (SMSF), eliminating the entire interest in the second Foreign Self Investment Pension Plan, can the SMSF make the election for the transfer to be included in the assessable income of the SMSF in accordance with subsection 305-80 of the ITAA 1997?

Answer

The Commissioner cannot make a ruling on this issue.

Question 4

If subsequent withdrawals/transfers are made to the first Foreign Self Investment Pension Plan, following the transfer of the 'previously exempt fund earnings' to the second Foreign Self Investment Pension Plan and full transfer eliminating the entire interest in the second Foreign Self Investment Pension Plan to the SMSF, will those amounts be non-assessable and non-exempt income in accordance with subsection 305-70(3) of the ITAA 1997?

Answer

The Commissioner cannot make a ruling on this issue.

This ruling applies for the following period:

Income year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

A person (the Taxpayer) emigrated from Country X and became a resident of Australia for taxation purposes more than 40 years ago.

Shortly after, the Taxpayer became a member of an Australian Defined Benefit Pension Plan (the Australian Fund).

Several years later, the Taxpayer returned to Country X and became a Foreign resident for taxation purposes.

Following the move to Country X, the Taxpayer's benefits in the Australian Fund were transferred to a Foreign Defined Benefit Pension Plan (the Foreign Fund).

More than 10 years later, the Taxpayer returned to Australia and has been a resident for taxation purposes since that date.

Some years later, Taxpayer's benefits in the Foreign Fund were transferred into a Foreign Self Investment Pension Plan (Foreign PP 1).

Administrators of the Foreign Fund are unable to provide the value of amounts contributed into the Foreign Fund by or in respect of the Taxpayer.

Administrators of the Foreign Fund are unable to provide the value of the amounts vested in the Taxpayer on any past dates.

The Taxpayer no longer has an interest in the Foreign Fund.

The Foreign Fund and Foreign NPP 1 are considered to be foreign superannuation funds for the purposes of Subdivisions 305-B of the ITAA 1997.

The Taxpayer intends to transfer their benefits in Foreign PP 1 into another Foreign Self Investment Pension Plan (Foreign PP 2) before transferring the funds from Foreign PP 2 into the SMSF.

The Commissioner accepts the estimation of employer contributions provided by the Taxpayer.

There were no transfers into the Foreign Fund from any other foreign superannuation funds.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 subsection 305-70(2)

Income Tax Assessment Act 1997 subsection 305-70(3)

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, section 305-80

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

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

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

Taxation Administration Act 1953, subsection 359-5(1)

Taxation Administration Act 1953, subsection 357-110(1)

Superannuation Industry (Supervision) Regulations 1994 subregulation 7.04

Reasons for decision

Question 1

Summary

The amount of applicable fund earnings in respect of the lump sum transferred from the Foreign Fund into Foreign PP 1 is a specified amount.

The applicable fund earnings amount is not assessable income and is not exempt income of the Taxpayer in the 2016-17 income year.

However, the specified amount must be included in the calculation of the Taxpayer's 'applicable fund earnings' under section 305-75 of the ITAA 1997 as 'the previously exempt fund earnings' if the benefits in Foreign PP 1 are transferred to another foreign superannuation fund, or to an Australia superannuation fund, at a later date.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Where a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, subsection 305-70(2) of the ITAA 1997 applies to include in their assessable income so much of the lump sum (excluding any amount paid into another foreign superannuation fund) as equals:

a. their 'applicable fund earnings'; or

b. if they have made a choice under section 305-80 of the ITAA 1997 - their applicable fund earnings, less the amount covered by the choice.

'Applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. In particular, subsection 305-75(3) of the ITAA 1997 is used to calculate applicable fund earnings where, as here, the taxpayer 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).

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

The effect of section 305-75 of the ITAA 1997 is that a person is assessed only on the income they earned on their benefits in a foreign fund during their residency period. Earnings made during periods of non-residency, and contributions and transfers into the foreign fund, do not form part of the taxable amount when the lump sum 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 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: Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997 (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.

Calculation of the applicable fund earnings amount - transfer from the Foreign Fund to Foreign PP 1

As the Taxpayer is not able to obtain the value of benefits in the Foreign Fund vested in the Taxpayer on the day just before the day they became a resident, the Commissioner has estimated the amount.

'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 taxation purposes and ceases on the day on which the lump sum is paid. The Taxpayer was a resident for the whole of the period to which this lump sum relates (second residency date to date of transfer). Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

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 amounts determined under paragraph 305-75(3)(d) of the ITAA 1997.

The result of this calculation is the portion of the lump sum payment transferred from the Foreign Fund Foreign PP 1 that is the 'applicable fund earnings'.

In accordance with subsection 305-70(4) of the ITAA 1997, the amount transferred from the Foreign Fund to Foreign PP 1 is not assessable income and is not exempt income of the Taxpayer.

However, the applicable fund earnings amount will be 'the previously exempt fund earnings' covered by subsections 305-75(5) or (6) of the ITAA 1997 that should be added to any future lump sum payment from Foreign PP 1 to another foreign superannuation fund or an Australian superannuation fund.

Previously exempt fund earnings

In accordance with subsection 305-75(5) of the ITAA 1997, a person has an amount of 'previously exempt fund earnings' in respect of a 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) of the ITAA 1997 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).

Therefore, the future 'previously exempt fund earnings' of the lump sum transferred from the Foreign Fund to Foreign PP 1 is the applicable fund earnings amount.

Questions 3 and 4

Summary

The Commissioner is unable to make a private ruling in relation to applicable fund earnings, or previously exempt fund earnings, in respect of future transfers from foreign superannuation funds because the correctness of the ruling would depend on assumptions made about future events or matters.

Private rulings

In accordance with subsection 359-5(1) of the Taxation Administration Act 1953 (TAA), the Commissioner may, on application, make a written ruling on how the Commissioner considers a relevant provision applies, or would apply, to a particular taxpayer in relation to a specified scheme, arrangement or transaction.

In accordance with subsection 357-110(1) of the TAA, the Commissioner may decline to make a private ruling if the Commissioner considers that the correctness of the ruling would depend on which assumptions were made about a future event or other matter.

Therefore, we will not be making a private ruling in respect of questions 3 and 4 in your application because the correctness of the ruling would depend on making a number of assumptions about future events and other matters including the following:

● the date(s) of any future transfer(s);

● the amount of the transfer(s);

● the amount in the foreign superannuation fund vested in the Taxpayer on the date of transfer(s); and

● the applicable foreign exchange rates on the date of transfer(s).

A decision to decline to make a ruling is reviewable under the Administrative Decisions (Judicial Review) Act 1977. For further information about your review rights, please read the explanatory notes attached to this letter.