Edited version of your written advice

Authorisation Number: 1051388894770

Date of advice: 25 October 2018

Ruling

Subject: Applicable Fund Earnings

Question

Is any part of the lump sum payment received from an overseas superannuation fund (Fund A) to a self-managed superannuation fund (Fund B) assessable as ‘applicable fund earnings’ under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Member of Fund B (the Member) migrated to Australia on a date in 1988-89 income year (the Residency Date) and has been an Australian resident for tax purposes since that date.

Prior to, and after migrating, the Member held an interest in a defined benefit pension scheme (Fund A).

Fund A was established and controlled in an overseas country.

There haven’t been any contributions or transfers made to Fund A since the Residency Date.

Fund A does not allow access to benefits prior to retirement.

In the 2017-18 income year the Member’s benefits in Fund A were transferred (the transfer) in a single transaction to the Fund B which is an Australian self-managed superannuation fund (SMSF) of which the Member is one of its members.

Documentation provided shows that the transfer went directly into Fund B’s bank account. The transfer value was in a foreign currency (X) which the bank, using its exchange rate, translated to Australian currency ($).

The Member has no further interest in Fund A as all the funds have been transferred into Fund B.

The Member has solely lived in Australia for the whole period in relation to the transfer from Fund A to Fund B.

Assumptions

The amount vested in Fund A on Residency Date as calculated.

The Member will make an election that all or part of the applicable fund earnings amount be treated as assessable income of Fund B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

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

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

Income Tax Assessment Act 1997 Section 305-80

Income Tax Assessment Act 1997 Section 960-50

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

Reasons for decision

Summary

A portion of the lump sum payment received from Fund A is assessable as ‘applicable fund earnings’ under section 305-70 of the ITAA 1997 and this amount should be included in the Member’s individual tax return for the 2017-18 income year.

However, the facts of this case show the Member is eligible to make an election to have all or part of the applicable fund earnings amount treated as assessable income of their Australian superannuation fund (Fund B).

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds.

‘Foreign superannuation fund’ is defined in subsection 995-1(1) of the ITAA 1997. In this case, the information provided indicates that the overseas fund, Fund B, is a foreign superannuation fund.

Where a taxpayer receives a lump sum paid from a foreign superannuation fund more than six months after Australian residency, the growth on their benefits in the 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, as in this case, the amount of growth i.e. or ‘applicable fund earnings’ is calculated under subsection 305-75(3) of the ITAA 1997.

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).

In short, only the income earned (the accretion) in respect of the overseas superannuation fund since Australian residency, less any contributions made in that period, is assessed. Further, any amounts representative of earnings 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. 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, the Commissioner considers what is 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 of the ITAA 1997 and 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.

Therefore, the ‘applicable fund earnings’ amount in respect of the lump sum payment from Fund A should be calculated by deducting the amount in Fund A on the day before the Residency Date from the amount in the Fund A just before payment. Both amounts should be translated using the exchange rate applicable on the day of receipt. In this case, the exchange rate applicable on the date of receipt.

Applicable Fund Earnings (AFE) Calculation

Transfer from Fund A to Fund B

Therefore as there is a positive ‘applicable fund earnings’ amount in respect of the lump sum payment transferred from the Fund A, that amount should be included as assessable income in the Member’s individual tax return for the 2017-18 income year.

Election

A taxpayer who transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the applicable fund earnings treated as the assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included in the assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal tax rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1) of the ITAA 1997).

In this case, as the Member no longer has an interest in Fund A and the transfer was made directly to Fund B, the Member is eligible to make the election for all or part of the applicable fund earnings treated as assessable income of Fund B.

Further it should be noted if an election is made for an Australian superannuation fund to only pay tax on some of the applicable fund earnings, the remaining amount is included in the taxpayer’s assessable income and taxed at their marginal rates.