Edited version of private advice

Authorisation Number: 1051603203202

Date of advice: 2 December 2019

Ruling

Subject: Applicable Fund Earnings

Question

Is any part of the lump sum payment received by the Taxpayer from their three foreign funds assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the applicable fund earnings are $xx.

This ruling applies for the following period:

Income year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Taxpayer migrated to Australia in 19xx.

Before arriving in Australia the Taxpayer has three Pension Schemes in Country X, they are named as

·        Foreign Fund #1,

·        Foreign Fund #2 and

·        Foreign Fund #3.

In the 2018-19 income year the Taxpayer transferred all their superannuation benefits in their Foreign Funds to Australia.

There were some contributions made to Foreign Fund #2 after the Taxpayer became a resident for tax purpose.

The administrators of Foreign Fund #3 are unable to provide the amount in the scheme that was vested in the Taxpayer on the day before the Residency Date.

We have estimated the value of the Taxpayer's benefit in Foreign Fund #3.

The receiving scheme in Australia was their SMSF which is a fully compliant QROPS registered scheme capable of receiving Country X pension transfers.

The Taxpayer could not access the retirement funds other than at retirement in the Country X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Subsection 305-70(1)

Income Tax Assessment Act 1997 Section 305-75

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

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

Income Tax Assessment Act 1997 Subsection 305-75 (5)

Income Tax Assessment Act 1997 Subsection 305-75 (6)

Income Tax Assessment Act 1997 Subsection960-50(1)

Income Tax Assessment Act 1997 Subsection960-50(4)

Income Tax Assessment Act 1997 Subsection995-1(1)

Superannuation Industry (Supervision) Act 1993 Section 10(1)

Reasons for decision

Lump sum payments transferred from foreign superannuation funds

When a person receives a lump sum from a foreign superannuation fund more than six months after they became an Australian resident, the growth they earned on their foreign superannuation during the period when they were a resident of Australia is included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997.

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as being a fund that is not an Australian superannuation fund. A superannuation fund has the meaning given by subsection 10(1) of the Superannuation Industry (Supervision) Act 1993, which requires that the fund is a 'provident, benefit, superannuation or retirement fund'.

In this case, the benefits from the Taxpayer's Pension Schemes cannot be accessed other than at retirement, death or incapacity and therefore meet the definition of foreign superannuation funds.

Applicable fund earnings

The applicable fund earnings amount in relation to a lump sum payment from a foreign superannuation fund, that is received more than six months after a person has become an Australian resident, is assessable under section 305-70.

The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

The Taxpayer became a resident of Australia for tax purposes in 19xx and received the lump sum payment in respect of their entitlement in the Foreign Fund #1, Foreign Fund #2, Foreign Fund #3 from April 20xx to June 20xx.

As their entitlement received more than six months after the Taxpayer became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' amount (if any) in his assessable income.

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As mentioned above, subsection 305-75(3) of the ITAA 1997 applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

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 earningsis 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 income 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).

'Previously exempt fund earnings' are any amounts in the lump sum paid to Australia by a foreign superannuation fund which had previously been transferred into that fund from a second foreign superannuation fund.

They are included in applicable fund earnings to the extent that they would have been included in assessable income under subsection 305-70(2) of the ITAA 1997 if they had originally been paid to Australia instead of being transferred to the second foreign superannuation fund.

The effect of section 305-75 of the ITAA 1997 is that 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 foreign are not taxable 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: Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that the exchange rate at which it is reasonable to translate amounts into Australian currency for the purposes of section 305-75 of the ITAA 1997, is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

The below tables show the calculation of the applicable fund earnings for the three foreign funds.

Lump Sum Transfer from Foreign Fund #1

Lump Sum Transfer from Foreign Fund #2

Lump Sum Transfer from Foreign Fund #3

1.     Therefore the 'applicable fund earnings' (converted into Australian dollars with the exchanged rate given) is $xxxx which is the sum of the applicable fund earnings from three Foreign Funds.

2.     When the Taxpayer transfers the entire amount to his SMSF, they can make an election to include the applicable fund earnings in the fund's assessable income for the 2018-19 financial year. The Taxpayer will have to make their election on the approved form - 'Completing your choice to have your Australian super fund pay tax on a foreign super transfer' (NAT 11724) and include the applicable fund earnings at question 16. The election cannot be varied or revoked and must be made before the Taxpayer lodges his income tax return for the same income year.