Edited version of private advice

Authorisation Number: 1051236870451

Date of advice: 07 July 2017

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of a transfer from an overseas pension fund assessable as 'applicable fund earnings' under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Relevant facts and circumstances

The Taxpayer arrived in Australia from overseas in the 1997-98 income year and has been an Australian resident for tax purposes since that date (the Residency Date).

While living overseas, the Taxpayer became a member of an Overseas Pension Fund, a defined benefit scheme established and controlled overseas.

Benefits cannot be accessed from the Overseas Pension Fund other than at retirement.

There were no contributions or transfers made into the Overseas Pension Fund since the Taxpayer became a resident of Australia for tax purposes.

As per the Rules of the Overseas Pension Fund, the Taxpayer elected to be paid a lump sum coupled with the receipt of an annuity from the Overseas Pension Fund. The pension annuity is paid on a monthly basis to the Taxpayer's UK Bank Account.

In the 2015-16 income year, the Taxpayer received a lump sum from the Overseas Pension Fund.

The Taxpayer was also advised a change in the factors used to determine member's benefits may result in him being entitled to additional benefits dating back to his retirement date.

The Taxpayer's preserved benefits were increased in line with increases to UK inflation rates.

A month later, the Taxpayer received a second lump sum from the Overseas Pension Fund in his UK Bank Account.

The second lump sum was the result of the recalculation of the Taxpayer's benefits following a change in the UK Pension Fund's factors used to calculate member's benefits.

The Taxpayer has not been able to obtain the value of their benefits on the day before the Residency Date and has asked for an estimate.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 subsection 305-75(3)

Income Tax Assessment Act 1997 paragraph 305-75(3)(a)

Income Tax Assessment Act 1997 paragraph 305-75(3)(b)

Income Tax Assessment Act 1997 paragraph 305-75(3)(c)

Income Tax Assessment Act 1997 section 305-80

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

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

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

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

Reasons for decision

Summary

A portion of the lump sum payment transferred by the taxpayer from the Overseas Pension Fund should be included as assessable income, the 'applicable fund earnings', in the taxpayer's income tax return for the 2015-16 income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Section 305-70 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum (if any) in their assessable income.

Based on the information provided, the Commissioner accepts the UK Pension Fund is a foreign superannuation fund.

In accordance with subsection 305-70(2) of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 of the ITAA 1997 is included in the assessable income of a person.

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.

The applicable fund earnings amount is 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 related.

Applicable fund earnings

The Taxpayer became a resident of Australia for tax purposes in the 1997-98 income year and the lump sum payments from the Overseas Pension Fund were transferred on two separate dates in the 2015-16 income year. As this was more than six months after the Taxpayer became an Australian resident, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in the Taxpayer assessable income for the relevant year.

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(3) 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:

1. work out the total of the following amounts:
   1. 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;
   2. 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;
   3. 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;
2. 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);
3. multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;
4. 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 earned on his benefits in the Overseas Pension Fund less any contributions he made since he became 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 (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 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 considers the correct rule for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' under section 305-75 is 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.

Calculation of the applicable fund earnings amount

The Commissioner has used UK inflation figures to calculate the amount vested in the taxpayer just prior to the date he became an Australian resident. As no transfers or contributions were made into the Overseas Pension Fund after the date of residency the amount of the applicable fund earnings is equal to the increase in the benefit due to indexation.