Edited version of private advice

Authorisation Number: 1051620447968

Date of advice: 17 December 2019

Ruling

Subject: Foreign fund transfer

Question

Is any part of the lump sum benefits paid from your foreign superannuation 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:

1 July 2019 to 30 June 2020

The scheme commences on:

14 August 2019

Relevant facts and circumstances

·        You became an Australian resident in 19XX.

·        Prior to arriving in Australia you were employed overseas and became a member of the fund.

·        There have been no contributions to the fund since you became an Australian resident.

·        The benefits from the fund cannot be accessed other than at retirement, death or incapacity.

·        In accordance with the fund rules there is a standard lump sum payment paid at retirement. The standard lump sum is generally three times the standard pension income amount. You can choose to give up some of your pension for an additional lump sum when your pension is due to start. The total amount of lump sum you can receive from the fund is 25% of the total value of your retirement benefits.

·        You have not provided the value of the lump sum amount for the date before you became an Australian resident.

·        There are no previously exempt fund earnings in relation to the lump sum.

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

Superannuation Industry (Supervision) Act 1993 subsection 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 your pension scheme cannot be accessed other than at retirement, death or incapacity and therefore meet the definition of a foreign superannuation fund.

Applicable fund earnings

You became a resident of Australia for tax purposes in 19XX. In 2019 you withdrew the 25% maximum lump amount from your foreign fund.

As the lump sum transfer was more than six months after you became an Australian resident, 'applicable fund earnings' will apply.

The applicable fund earnings amount is 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.

Subsection 305-75(3) of the ITAA 1997 is applicable in this instance and 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 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).

The effect of section 305-75 of the ITAA 1997 is that only the income earned in respect of the foreign 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 lump sum 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 it is reasonable to use the exchange rate applicable at the time of receipt of the foreign lump sum payment to work out the Australian dollar equivalent.