Edited version of your written advice

Authorisation Number: 1051357026460

Date of advice: 3 May 2018

Ruling

Subject: Applicable Fund Earning

Question

Is any part of the benefit received by the taxpayer from an overseas pension scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

15 October 19XX

Relevant facts and circumstances

1. The taxpayer arrived in Australia from an overseas country in 19XX, and has been an Australian resident since then.

2. The Taxpayer held an interest in a pension scheme established and controlled in a foreign country (Foreign Pension Scheme 1).

3. In 201X, the Taxpayer transferred the balance of the Foreign Pension Scheme 1 to the Foreign Pension Scheme 2, which is also a pension scheme established and controlled in an overseas country.

4. The Taxpayer provided evidence to indicate that the Foreign Pension Scheme 1 and the Foreign Pension Scheme 2 are foreign superannuation funds.

5. The value of the Taxpayer’s benefits transferred from the Foreign Pension Scheme 1 to the Foreign Pension Scheme 2 in 201X was a certain value.

6. In 201X, the entirety of the Taxpayer’s benefits in the Foreign Pension Scheme 2 was transferred to a complying superannuation fund in Australia (the Australian Fund).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

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

Income Tax Assessment Act 1997 subsection 305-75

Income Tax Assessment Act 1997 paragraph 305-75(2)

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

Income Tax Assessment Act 1997 subsection 960-50

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

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

Reasons for decision

Summary

A portion of the lump sum payment transferred by the Taxpayer from the Foreign Pension Scheme 2 to the Australian Fund will be included as assessable ‘applicable fund earnings’ in the Taxpayer’s income tax return for the 201X-1X income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

1. 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.

2. The Taxpayer became a resident of Australia for tax purposes in 19XX. The Taxpayer’s benefits were transferred to the Australian Fund in 201X. As this was more than six months after the Taxpayer became an Australian resident, section 305-70 of the ITAA 1997 applies to the payment so that an amount of applicable fund earnings (if any) is included in their assessable income for the 201X-1X income year.

Applicable fund earnings

3. 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.

4. 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).

5. The effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income earned on their benefits in the Foreign Pension Scheme 2 less any contribution made since the Taxpayer 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

6. 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.

7. 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

8. The calculation of the applicable fund earnings for the Taxpayer is shown in the tables below with reference to the facts of the case. As discussed above, for table 2, any amounts in foreign currency are translated into Australian dollars using the exchange rate applicable on the day of receipt into Foreign Pension Scheme 2.

Transfer from Foreign Pension Scheme 1 to Foreign Pension Scheme 2 (Table 1)

9. In accordance with subsection 305-70(4) of the ITAA 1997, the amount transferred from Foreign Pension Scheme 1 to Foreign Pension Scheme 2 is not assessable income and is not exempt income of the Taxpayer. However, the applicable fund earnings amount is counted as ‘previously exempt fund earnings’ for the purposes of calculating the applicable fund earnings amount in respect of the transfer from Foreign Pension Scheme 2 to the Australian Fund.

Transfer from Foreign Pension Scheme 2 to the Australian Fund (Table 2)

10. Therefore, the ‘applicable fund earnings’ amount in respect of the lump sum payment transferred from the Foreign Pension Scheme that should be included in the Taxpayer’s assessable income for the 201X-1X income year is a certain value.

Election

11. According to section 305-80 of the ITAA 1997, a taxpayer who is transferring their overseas superannuation benefits directly to an Australian complying superannuation fund is able to elect to have the Australian superannuation fund pay the tax on the applicable fund earnings if the taxpayer no longer has an interest in the overseas fund immediately after the payment.

12. So long as the Taxpayer no longer has an interest in the Foreign Pension Scheme, they are eligible to make the election in relation to the lump sum transfer.

13. If an election is made, the elected amount will be assessable to the superannuation fund and subject to tax at 15% rather than being assessable to the Taxpayer and subject to tax at the Taxpayer's marginal tax rate.