Edited version of private advice

Authorisation Number: 1051570541466

Date of advice: 2 September 2019

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1

Does item 11A of subsection 960-50(6) of the Income Tax Assessment Act 1997 (ITAA 1997) require that the amounts referred to in subparagraph 305-75(3)(a)(i) and paragraph 305-75(3)(b) be translated into Australian currency at an exchange rate that is reasonable having regard to the circumstances?

Answer

Yes

Question 2

For the purposes of calculating applicable fund earnings under section 305-75 of the ITAA 1997, is it reasonable to translate the amount vested when the taxpayer became an Australian resident at the exchange rate on the day the taxpayer became an Australia resident?

Answer

No.

Question 3

For the purposes of calculating applicable fund earnings under section 305-75 of the ITAA 1997, is it reasonable to translate the amount of the lump sum paid at the exchange rate on the day the lump sum was paid?

Answer

Yes.

Question 4

Can the taxpayer choose to have the applicable fund earnings amounts (if any) in respect of the lump sum payment made from the foreign fund included in the assessable income of the Australian fund, a complying superannuation fund, under subsection 305-80(2) of the ITAA 1997?

Answer

No.

Question 5

Will the Australian fund be entitled to a foreign income tax offset under section 770-10 of the ITAA 1997 for any part of the foreign income tax paid on the lump sum?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The taxpayer was a member of a foreign fund.

The foreign fund is a 'foreign superannuation fund' for the purposes of the relevant provisions.

The taxpayer became a member of foreign fund in 1990 and continued making contributions to the foreign fund until they came to Australia on the residency date in 2004.

Since the residency date, the taxpayer has been a permanent resident of Australia and has not made any contributions or transfers into the foreign fund.

Under the relevant foreign income tax law, a lump sum paid on withdrawal is taxable income and subject to particular tax rates. The amount of the foreign income tax payable is required to be withheld by the foreign fund.

The taxpayer became a member of the Australian fund which we are advised is a complying superannuation fund.

A letter from the foreign fund dated in the first quarter of the 2018-19 income year shows a lump sum payment in foreign currency was made to a foreign bank account held by the taxpayer. Foreign tax was withheld.

In the same quarter, an application was lodged by the taxpayer to the foreign bank to make a lump sum payment to the Australian fund.

In the same quarter, a bank statement for the Australian fund shows that on an amount of in Australian dollars was received from the taxpayer's foreign bank account.

The taxpayer proposes to choose under subsection 305-80(2) of the ITAA 1997 that the part of the lump sum that is otherwise assessable to them under subsection 305-70(2) is instead assessable to the Australian fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-80

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 section 770-130

Income Tax Assessment Act 1997 section 960-50

Reasons for decision

Summary

For the purposes of calculating applicable fund earnings under section 305-75 of the ITAA 1997, the current ATO view in ATO Interpretative Decision ATO ID 2015/7 Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997 is applied and that is:

• it is not reasonable to translate the amount vested when the taxpayer became an Australian resident at the exchange rate on the day the taxpayer became an Australia resident. The only reasonable exchange rate is the rate at the time that the lump sum was paid.
• it is reasonable to translate the amount of the lump sum paid at the exchange rate on the day the lump sum was paid.

Any applicable fund earnings amount is to be included in the taxpayer's assessable income for the 2018-19 income year. However, the taxpayer is entitled to a foreign income tax offset for any income tax withheld from their income in the foreign country limited to the amount to which they are entitled under section 770-10 of the ITAA 1997.

The Australian fund is not entitled to a foreign income tax offset under section 770-10 of the ITAA 1997 for any part of the foreign income tax paid on the lump sum.

The taxpayer cannot choose to have the applicable fund earnings, in respect of the lump sum payment made from the foreign fund, included in the assessable income of the Australian fund under subsection 305-80(2) of the ITAA 1997.

Detailed reasoning

Election under section 305-80 of the ITAA 1997

A person may choose to have a superannuation lump sum from a foreign superannuation fund transferred to a complying superannuation fund rather than being paid directly to the person. In such a case, the person may elect under section 305-80 of the ITAA 1997 for all or part of their applicable fund earnings amount to be included in the assessable income of the complying superannuation fund.

However, the choice can only be made if all the conditions in subsection 305-80(1) of the ITAA 1997 are satisfied. That is if the:

• person is taken to have received the lump sum under section 307-15 of the ITAA 1997;
• whole of the lump sum is paid directly from the foreign superannuation fund into a complying superannuation fund; and
• person no longer has an interest in the foreign superannuation fund immediately after the lump sum is paid.

In this case the lump sum was not paid directly from the foreign fund to the Australian fund. The taxpayer received the lump sum from the foreign fund when the amount was paid to the foreign bank account held by the taxpayer. Almost two months later, this amount was transferred to the Australian fund.

As the lump sum was not paid directly from the foreign superannuation fund into a complying superannuation fund, the taxpayer cannot make an election under section 305-80 of the ITAA 1997 to have any part of the applicable fund earnings included in the assessable income of the Australian fund.

Tax treatment of superannuation benefits from foreign superannuation funds

In accordance with subsection 305-70(2) of the ITAA 1997, a person who receives a superannuation lump sum from a foreign superannuation fund must include in their assessable income, so much of the lump sum as is equal to the applicable fund earnings worked out under section 305-75 of the ITAA 1997.

The remainder of the lump sum is not assessable income and is not exempt income (subsection 305-70(3) of the ITAA 1997).

Consequently, any applicable fund earnings amount is to be included in the taxpayer's assessable income for the 2018-19 income year.

Foreign income tax offset for the Australian fund

Division 770 allows a non-refundable tax offset for an income year for foreign income tax paid where that amount of foreign income tax is paid in respect of an amount that is included in your assessable income for the year. Therefore this issue is only relevant if the applicable fund earnings is included in the assessable income of the Australian fund under subsection 305-80(2) of the ITAA 1997. In this case, the taxpayer cannot elect to have the applicable fund earnings included in the income of the Australian fund.

Foreign income tax offset for the individual

The taxpayer is entitled to a foreign income tax offset for any income tax withheld from their income in the foreign country limited to the amount to which they are entitled under section 770-10 of the ITAA 1997.

Please note, if claiming a foreign income tax offset of more than $1,000, the taxpayer will have to work out their foreign income tax offset limit. This may result in the tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded.

If the taxpayer is claiming a foreign income tax offset of $1,000 or less, they only need to record the actual amount of foreign income tax paid that counts towards the offset (up to $1,000).

More information on the calculation of the foreign income tax offset cap and entitlements are available on the Tax office website www.ato.gov.au at the link to "Guide to foreign income tax offset rules 2019".