Edited version of private advice

Authorisation Number: 1051577175291

Date of advice: 28 October 2019

Ruling

Subject: Applicable fund earnings

Question 1

Is any part of the first lump sum payment received by you from the foreign pension scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is any part of the second lump sum payment received by you from the foreign pension scheme assessable as applicable fund earnings under section 305-70 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have been a tax resident of Australia since 20XX.

You and your former spouse are divorced. Your former spouse is a member of an overseas pension scheme. This pension scheme is a foreign superannuation fund.

An order was made by a family court in the foreign jurisdiction which states that your former spouse's interest in the overseas pension scheme are to be transferred in full to you in accordance with the annex to the order.

The annex to the order made under foreign legislation states that the overseas pension scheme is required to transfer to you an amount equal to 100% of the value of your former spouse's interest in the scheme.

You joined an overseas pension plan (your scheme) in late 20XX. Your scheme is a foreign superannuation fund.

Shortly after the date you joined your scheme, your former spouse's overseas pension scheme paid the amount payable to your scheme. Initial charges were deducted from your vested amount in your scheme.

You immediately withdrew a 'pension commencement lump sum' from your scheme. This was the first lump sum payment from your scheme.

Immediately after the payment of the pension commencement lump sum, your vested interest in your scheme was provided.

In the 20XX-XX income year a second lump sum was made from your scheme. The total amount in your scheme that was vested in you when this lump sum was paid was provided.

You made no other transfers or contributions to your scheme.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70.

Income Tax Assessment Act 1997 section 305-75.

Income Tax Assessment Act 1997 section 960-50.

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Summary

The 'applicable fund earnings' in respect of the first lump sum payment from your foreign pension scheme (your scheme) is nil.

The 'applicable fund earnings' in respect of the second lump sum payment from your scheme is $XXX. This amount must be included in your income tax return for the 20XX-XX income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

'Foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997. In this case, you provided evidence to indicate that your scheme is a foreign superannuation fund as defined by the Act.

Therefore, section 305-70 of the ITAA 1997 applies in this case as the superannuation lump sum amounts were each received from the foreign superannuation fund more than six months after Australian residency.

In accordance with section 305-70 of the ITAA 1997, you are required to include in your assessable income so much of the lump sum amounts as equals your applicable fund earnings.

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997.

The amount included as assessable income is calculated under subsection 305-75(2) of the ITAA 1997 because you were an Australian resident at all times during period to which the lump sums relate. Subsection 305-75(2) of the ITAA 1997 states:

If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

(ii)    the part of the lump sum (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 income tax);

(c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6).

Furthermore, in regards to the calculating the applicable fund earnings for a second lump sum payment, subsection 305-75(4) states that:

If the lump sum is not the first lump sum from the fund you have received to which this section applies, for subsections (2) and (3) the start day is the day after you received the most recent such lump sum.

The effect of section 305-75 of the ITAA 1997 is that you are assessed only on the income earned on your benefits in the foreign superannuation fund during the period between the start day and the date when the lump sum is paid. Any amounts attributable to contributions made by you or transfers from other foreign funds also 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 considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of each lump sum payment from your scheme should be calculated by deducting the amount in your scheme on the start date, and any contributions and transfers made into your scheme since the start date, from the amount in your scheme just before the payment. These amounts should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum.

First lump sum payment from your foreign pension scheme

The applicable fund earnings in the first lump payment is nil. This is because the total of the amount in the scheme on the start date and the amount transferred into your scheme following the start date is the same as the amount vested in you on the payment date. That is, the benefits in your scheme earned nil income in the period between the start date and payment date.

Second lump sum payment from your foreign pension scheme

Subsection 305-75(4) of the ITAA 1997 states that if a lump sum is not the first lump sum that a person has received from a fund then the start day, for the purposes of 305-75(2) of the ITAA 1997, is the day after a person received their most recent lump sum.

The amounts used to calculate the applicable fund earnings in respect of the second lump sum payment is shown in the table below. As discussed above, any amounts in foreign currency is translated into Australian dollars using the exchange rate applicable on the date of receipt.

In accordance with subsection 305-75(2) of the ITAA 1997 the amounts determined at subparagraphs 305-75(2)(a)(i) and (ii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(2)(b) of the ITAA 1997.

To this figure we add the amounts determined under paragraph 305-75(3)(c) of the ITAA 1997.

Please note, where an individual receives a superannuation lump sum from a foreign superannuation and that amount only represents a part of the amount vested in them at the time of payment, it is the Commissioner's view that there is no basis for applying a proportionate approach in working out the applicable fund earnings. This is consistent with the Commissioner's view in ATOID 2012/48.

Therefore, your applicable fund earnings in accordance with subsection 305-75(2) of the ITAA 1997 is $XXX. This amount must be included in your tax return for the 20XX-XX income year.