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Edited version of your written advice
Authorisation Number: 1051509278365
Date of advice: 24 May 2019
Ruling
Subject: Applicable fund earnings
Question
Is any part of the lump sum payment received by the taxpayer from the foreign fund 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 ending 30 June 2019
The scheme commences on:
1 July 2018.
Relevant facts and circumstances
1. The taxpayer became a resident of Australia for taxation purposes in the 2005-06 income year.
2. Advice was provided by the ATO advising the value of the taxpayer’s benefits in Fund A at residency date.
3. In the 2014-15 income year the taxpayer transferred all benefits in Fund A to Fund B.
4. In the 2014-15 income year the taxpayer transferred benefits from Fund B to Fund C.
5. In the 2015-16 income year the taxpayer transferred a lump sum amount from Fund C to the self-managed superannuation fund (SMSF). This represented the entirety of the monies in Fund C at that date.
6. As per previous advice provided by the ATO the applicable fund earnings from Fund C to the Fund D was calculated.
7. In the 2018-19 income year the taxpayer transferred a lump sum amount from Fund B to the SMSF. This represented the entirety of the monies in Fund B.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 305-70
Income Tax Assessment Act 1997 section 305-75
Reasons for decision
If an individual taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, the taxpayer’s assessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while the taxpayer was an Australian resident.
In this case, the foreign fund is a foreign superannuation fund. The taxpayer was an Australian resident at all times during the period to which the lump sum relates. Therefore, the applicable fund earnings is calculated in accordance with subsection 305-75(2) of the ITAA 1997.
The effect of section 305-75 of the ITAA 1997 is that the individual taxpayer is only assessed on the income they earned on their benefits in the foreign fund while they were an Australian resident. Earnings during periods of non-residency, contributions and transfers into the foreign fund are not taxable when the overseas benefit is paid.
When calculating the applicable fund earnings, subsection 305-75(4) of the ITAA 1997 must also be considered. Subsection 305-75(4) states how the calculations under subsections 305-75(2) and (3) apply if the relevant superannuation lump sum is not the first lump sum paid from a foreign super fund. Therefore, where the lump sum is not the first lump sum from the fund, the start day for the purposes of the calculation is the day after the most recent lump sum was received.
An amount of applicable fund earnings may also include amounts of previously exempt fund earnings which occur where an amount in a foreign super fund is transferred to another foreign super fund before being received in Australia. These earnings would not otherwise be included and are set aside until the lump sum is transferred to you, or your complying Australian super fund.
The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in ATO Interpretative Decision ATO ID 2015/17: Income tax/Superannuation Foreign currency translation rules in working out ‘applicable fund earnings’ under section 305-75 of the ITAA 1997. We use the exchange rate that applied when the Australian superannuation fund received the lump sum, to work out the Australian dollar equivalent for the amount in the foreign superannuation fund that was vested in the taxpayer on a certain date.
Using an exchange rate applicable at the time the applicable fund earnings’ amount has been calculated in accordance with subsection 305-75(2) of the ITAA 1997.
The taxpayer should include their applicable fund earnings amount in their assessable income for the 2018-19 income year:
If the amount the taxpayer transfers is the entire amount in their foreign super fund to a complying Australian super fund, they can elect for the fund to include the applicable fund earnings in the fund’s assessable income for the 2018-19 income year.
To make this choice, they should complete the Completing your choice to have your Australian fund pay tax on a foreign super transfer (NAT11724) form. If they chooses this option, they do not need to declare the amount in the assessable income for the 2018-19 income year. This election cannot be varied or revoked. The election must be made before they lodge their income tax return for the same income year.