Edited version of private advice

Authorisation Number: 1051624293375

Date of advice: 28 January 2020

Ruling

Subject: Foreign fund transfer

Question

Is any part of a lump sum payment received from a foreign superannuation fund assessable as applicable fund earnings as worked out under section 305 75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Taxpayer became a resident of Australia for tax purposes in 200X.

The Taxpayer holds interests in pension scheme (the Scheme) which are located and controlled in Country A.

The Taxpayer cannot access his benefits in the Scheme other than at retirement and incapacity.

The trustee of the Scheme is not able to provide the value of the Taxpayer's benefit in the fund on the day just before they became a resident of Australia. However it was agreed that an amount calculated by the ATO would be used.

There were no contributions or pension amalgamations to the Scheme while the Taxpayer was a resident of Australia.

The Taxpayer was paid a lump sum payment from the Scheme which was transferred to a complying Australian superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 995(1)

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Section 305-80

Income Tax Assessment Act 1997 Subsection 306-70

Income Tax Assessment Act 1997 Section960-50

Superannuation Industry (Supervision) Act 1993 Section 10

Reasons for decision

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

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 of the Income Tax Assessment Act 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 Country A 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

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.

An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund.

The Taxpayer became a resident of Australia for tax purposes on XX 200X and received the lump sum payment in respect of their entitlement in the Scheme on XX 20XX. As this was 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 their 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).

This means that the Taxpayer is assessed only on the income earned on their benefits in the Foreign Fund less any contributions they made since becoming a resident of Australia. Any earnings made during periods of non-residency, and transfers into the paying fund 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: 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, in considering Item 11A of the table in subsection 960-50(6) of the ITAA 1997, determined that the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsection 305-75(3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

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

Summary of amounts to be used in the calculation

The amount in the Country A fund that was vested in the individual just before the day they became an Australian as translated into AUD on the day of receipt of the relevant superannuation lump sum was A$1 = XX: which converts the amount of XX ( accepted as an estimate) to A$XX

From the facts provided no contributions have been made to the Foreign Fund since the Taxpayer migrated to Australia.

The Taxpayer's benefit transferred from the Foreign Fund to the Australian Fund. This is converted into Australian dollars at the exchange rate that applied on that day. The exchange rate that applied was A$1 = XX, which converts the amount of YY to A$YY

'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident for tax purposes and ceases on the day the lump sum is paid. The Taxpayer was a resident for tax purposes for the whole of this period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

Applying subsection 305-75(3) of the ITAA 1997 to your circumstances, the amounts to be used in calculating the applicable fund earnings for Pension Fund 1 are as follows:

305-75(3)(a)(i) $XX

305-75(3)(a)(ii) Nil

305-75(3)(a)(iii) Nil

305-75(3)(b) $YY

305-75(3)(c) 1

305-75(3)(d) Nil

In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added:

$XX + nil + nil = $XX

This total is then subtracted from the amount determined under paragraph 305-75(3)(b):

$YY less $XX is $AA

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c):

$AA x 1 = $AA

To this figure we add the amounts determined under paragraph 305-75(3)(d):

$AA + nil = $AA

An amount of $AA of the lump sum payment from Pension Fund 1 will be included as assessable 'applicable fund earnings' in your tax return for the 2018-19 income year.

Election

A taxpayer who is transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the applicable fund earnings amount treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal tax rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997.

As the Taxpayer no longer has an interest in the Foreign Fund, the Taxpayer may chose for all, or part, of the applicable fund earnings amount of amount to be included in the assessable income of the Australian Fund.