Edited version of private advice

Authorisation Number: 1051620561743

Date of advice: 7 May 2020

Ruling

Subject: Applicable fund earnings

Question 1

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

Answer

Yes

Question 2

Can your client claim a foreign income tax offset for the tax paid/withheld overseas if any portion of the lump sum is taxable in Australia?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your client migrated to Australia in the 20XX-XX income year and has been a resident of Australia for tax purposes since that date.

Your client held an interest in an overseas pension plan (the Fund).

Your client could access their benefits on reaching retirement age of 55.

On attaining the age of 55, your client claimed a lump sum payment from the Fund.

Your client received a lump sum payment from the Fund in the 2018-19 income year.

An amount of tax was withheld from the lump sum payment.

Your client does not have a value of their interest in the Fund at the date of residency.

There have been no contributions to the Fund since yourclient migrated to Australia.

There were no transfers into the Fund from foreign superannuation funds since your client migrated to Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Subsection305-75(2)

Income Tax Assessment Act 1997 Subsection305-75(3)

Income Tax Assessment Act 1997 Subsection960-50(1)

Income Tax Assessment Act 1997 Subsection960-50(4)

Income Tax Assessment Act 1997 Subsection995-1(1)

Income Tax Assessment Act 1997 Subsection 770-10(1)

Income Tax Assessment Act 1997 Subsection 770-15(1)

Income Tax Assessment Act 1997 Section 770-70

Income Tax Assessment Act 1997 Section 770-75

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

Reasons for decision

Summary

A portion of the lump sum benefits your client received from the Fund is assessable as 'applicable fund earnings'.

The amount of applicable fund earnings is $X.This amount is to be included as assessable income in your client's income tax return for the relevant income year.

Your client is entitled to a foreign tax income tax offset in respect of foreign income tax paid on an amount that is included in their assessable income.

Lump sum payments transferred from foreign superannuation funds

Where a person receives a lump sum from a foreign superannuation fund more than six months after they became an Australian resident, the growth in their interest during the period 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 client's Fund cannot be accessed other than at retirement, death or incapacity and therefore meet the definition of foreign superannuation fund.

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.

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.

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. 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 calculation of applicable fund earnings in your client's case has been calculated in accordance with subsection 305-75(3) of the ITAA 1997.

Foreign Income Tax Offset

A taxpayer is entitled, under subsection 770-10(1) of the ITAA 1997, to a foreign income tax offset in respect of foreign income tax paid on an amount that is included in their assessable income.

Subsection 770-15(1) of the ITAA 1997 defines 'foreign income tax' to include a tax on income that is imposed by a law other than an Australian law.

A note to section 770-15 of the ITAA 1997 points out that 'foreign income tax' includes only that which has been correctly imposed under the foreign law, and where the foreign jurisdiction has a tax treaty with Australia under the Agreements Act, foreign income tax includes only tax which has been correctly imposed under the treaty.

Section 770-70 of the ITAA 1997 states that the amount of your tax offset for the year is the sum of the foreign income tax you paid that counts towards the offset for the year.

When part of an amount on which foreign tax has been paid is assessable, the same proportion of the foreign tax counts towards the offset.

There is a limit on the amount of your tax offset for a year (section 770-75 of the ITAA 1997). If you claim an offset of $1,000 or less, you only need to record the actual amount of foreign income tax paid that counts towards the offset.

If you claim more than $1,000, you will have to work out your foreign income tax offset limit.

In this case, your client had an amount of tax withheld when the lump sum payment was made.

If the foreign tax is withheld from the gross payment under the law of the foreign country, they are entitled to a foreign income tax offset under section 770-10 of the ITAA 1997 for the tax paid on a proportionate basis for the share of foreign income included in their assessable income.

Your client will need to apportion the foreign tax paid over the assessable and non-assessable component of the lump sum withdrawn on which the foreign tax was imposed.