Edited version of private advice

Authorisation Number: 1051652038993

Date of advice: 26 March 2020

Ruling

Subject: Lump sum payment from a foreign fund

Question

Is any part of the lump sum payment received from the 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:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You had an interest in the Fund, a foreign pension fund. Membership with the Fund commenced in the 20XX-XX income year.

The value of your interest in the Fund was the result of an amalgamation of three smaller funds in the Fund.

You became an Australian resident for tax purposes in the 20XX-XX income year.

The value of your interest in the Fund just before your Australian residency was $X.

You were also a non-resident of Australia for tax purposes for some time during the 20XX-XX, 20XX-XX, 20XX-XX income years (and the total non-resident days calculated accordingly).

The value of the Fund in late 20XX-XX (prior to any drawdown) was $Y.

You received a pre commencement lump sum (PCLS) representing a percentage of the value of your interest in the Fund at that time in the 20XX-XX income year.

A PCLS is a superannuation lump sum pursuant to subsection 307-65(1).

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

You are also currently in receipt of a pension from the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Section 305-70

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 307-65(1)

Income Tax Assessment Act 1997 Section 960-50

Income Tax Assessment Act 1997 Subsection 960-50(1)

Income Tax Assessment Act 1997 Subsection 960-50(4)

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

All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

A portion of the pre commencement lump sum (PCLS) received from the Fund must be included as 'applicable fund earnings' in your income tax return for the 20XX-XX income year.

Detailed reasoning

Subdivision 305-B deals specifically with superannuation lump sums from foreign superannuation funds.

Section 305-70 applies to superannuation lump sums received by an individual from a foreign superannuation fund more than six months after the individual either becomes an Australian resident or terminates their foreign employment.

As per the facts of this case, the fund is a foreign superannuation fund pursuant to subsection 995-1(1) and the PCLS is a lump sum pursuant to subsection 307-65(1).

You became a resident of Australia in the 20XX-XX income year, and received a PCLS of a certain percentage of the value of your interest in the Fund in the 20XX-XX income year.

As this is more than six months after you became an Australian resident, section 305-70 applies to include any 'applicable fund earnings' in relation to the lump sum received from the Fund in your assessable income.

It is not the entire PCLS which is assessable, but the growth in respect of the PCLS while you were an Australian resident. Accordingly, the assessable portion of any total applicable fund earnings calculated will need to be apportioned in accordance with the percentage of the PCLS received.

Applicable fund earnings

The applicable fund earnings 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, will be 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 worked out under either subsection 305-75(2) or 305-75(3). 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 overall effect of section 305-75 is that you will be assessed on the sum of:

·         the total growth earned on your benefits in the foreign superannuation fund during the period between the start day and the date when the lump sum is paid; and

·         any previously exempt fund earnings.

Foreign currency conversion

Subsection 960-50(1) 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) 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 Income tax/Superannuation: 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 1197 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Therefore, for the purposes of section 305-70, the 'applicable fund earnings' amount in respect of the lump sum received from a fund should be calculated by deducting the Australian dollar equivalent of the amount vested in the fund just before the day the taxpayer first became an Australian resident, from the amount received by the taxpayer from the fund. Both amounts should be translated using the exchange rate applicable on the day of receipt of the lump sum.

Amounts to be used in calculation

Subsection 305-75(3) 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).

In your case, applicable fund earnings have been calculated in accordance with subsection 305-75(3).