Edited version of private advice

Authorisation Number: 1051627386864

Date of advice: 10 June 2021

Ruling

Subject: Lump sum payments from foreign superannuation funds

Question

Are the lump sum payments received from your foreign funds 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:

Income year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

•         The Taxpayer migrated to Australia and became a permanent resident for tax purposes in November 19XX (the Residency Date) and has been an Australian resident for tax purposes since that date.

•         The Taxpayer has defined benefit interest in Fund A, a pension scheme established and controlled in the Country A.

•         The Taxpayer has a defined benefit interest in Fund B, a pension scheme established and controlled in the Country A.

•         The Taxpayer's interests in both Fund A and Fund B were deferred benefits and indexed in line with Country A inflation.

•         Details of the benefits in Fund A and Fund B were based on fund statements.

•         In MMM 2019, the Taxpayer transferred a lump sum benefit in Fund A to his Australian bank account.

•         In MMM 2019, the Taxpayer transferred a lump sum benefit in Fund B to his Australian bank account.

•         The Taxpayer started to receive a monthly pension from Fund A and Fund B at the time of requesting the lump sum payments. The lump sums represented a portion of the total benefits. No benefits had been taken out of either fund prior to the withdrawals.

•         According to both schemes the Taxpayer could not access their benefits in the Foreign Funds other than at retirement in the Country A.

•         There have been no contributions or amalgamations to the Foreign Funds since the Taxpayer migrated to Australia.

•         There were no periods of non-residency since the Residency Date for the Taxpayer.

•         The exchange rate on the Transfer Date was published on the Australian Taxation Office's (ATO) website.

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 305-80

Income Tax Assessment Act 1997 section 960-50

Income Tax Assessment Act 1997 subsection 995-1(1)

We followed these ATO view documents

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

ATO ID 2012/49: Superannuation lump sum paid from a foreign superannuation fund to an Australian resident at the same time as an annuity commenced: applying section 305-75 of the ITAA 1997.

Reasons for decision

Lump sum payments transferred from foreign superannuation funds

Where a person receives a lump sum payment from a foreign superannuation fund more than six months after they become an Australian resident the part of the payment that is "applicable fund earnings" is included in their assessable income.

Fund A and Fund B are foreign superannuation funds and the payments the Taxpayer received were made more than six months after they became an Australian resident.

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

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As the Taxpayer became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings are worked out in accordance with subsection 305-75(3) of the ITAA 1997 which 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 earnings is 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 intended effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the earnings or growth on their benefits in the Foreign Fund during the relevant period. Earnings made during periods of non-residency, contributions, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

As the method to calculate the amount of applicable fund earnings involves amounts that are in a foreign currency it is necessary to consider the foreign currency translation rules.

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.

For the purposes of working out the "applicable fund earnings" in relation to a superannuation lump sum under section 305-75 of the ITAA 1997, the correct rule for translating foreign currency into AUD is the rule described in Item 11A of the table in subsection 960-50(6) of the ITAA 1997. In the circumstances of this case, each amount in a foreign currency that is an element in the calculation of the Taxpayer's "applicable fund earnings" is to be translated to AUD at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Payment from Country A Funds to Australia

Proportionate approach

It is the Commissioner's view that where an individual commences a pension from a foreign superannuation fund at the same time as the superannuation lump sum is paid from the fund, subsection 305-75(3) of the ITAA 1997 is applied having regard only to the individual's lump sum entitlement. That is, regard is had only to so much of each of the relevant vested amounts that was, at the relevant times, payable as a lump sum. The part of the vested amount that relates to the pension is disregarded.

This approach ensures that the individual is not assessed on earnings that have, in effect, accrued in relation to the pension that will be paid from the foreign superannuation fund.

As the Taxpayer received a lump sum amount that was a portion of his interest in Fund A and Fund B, this proportion will be used to calculate the applicable fund earnings in relation to the lump sum amounts received.

Fund A

As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = Zxxx.

Therefore the 'applicable fund earnings' amount in respect of the lump sum amount transferred from the Fund A that should be included in your assessable income for the 2019 year of income is $xxx.

Fund B

As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = Zxxx.

Therefore the 'applicable fund earnings' amount in respect of the lump sum amount transferred from the Fund A that should be included in your assessable income for the 2019 year of income is $xxx.