Edited version of your private ruling

Authorisation Number: 1051739419729

Date of advice: 31 August 2020

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the lump sum benefit 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:

Income year ended 30 June 2019

Relevant facts and circumstances

·         From the period 19XX to November 19XX you worked and lived in the United Kingdom (UK) and were a tax resident of the UK.

·         You became an Australian resident for tax purposes from DDMMYY.

·         During your time in the UK you purchased a house that was financed by a deposit and an interest only loan. The nature of the loan was that you were required to repay the capital by the age 65, from a parallel endowment policy (Policy) you contributed to through the same institution. At maturity there was an expectation that the Policy would enable the repayment of all the capital.

·         The Policy was taken out with a UK Fund in January 199X via a personal pension plan account.

·         Sometime after January 200X You sold the house and returned to Australia, which left the Policy within the UK Fund. No further contributions were made.

·         You were advised that the Policy within the UK Fund could be converted to a UK pension/annuity, subject to tax as a non-UK resident.

·         In early-mid 201X you transferred your total benefits from the UK Fund to an Isle of Man Fund (IM Fund). The IM Fund is listed with the UK tax authority HM Revenue & Customs as a Qualifying Recognised Overseas Pension Scheme (QROPS).

·         No contributions were made to the IM Fund after the date of transfer.

·         The benefits from the UK Fund and the IM Fund cannot be accessed other than at retirement, death or incapacity.

·         During late 201X you withdrew a lump sum from the IM Fund, which was paid into your UK bank account. During late 201X the lump sum was transferred to your Australian bank.

·         You commenced a pension from the IM Fund at the time of the lump sum withdrawal.

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)

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

Detailed reasoning

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 UK and IM Funds cannot be accessed other than at retirement, death or incapacity and therefore meet the definition of foreign superannuation funds.

Applicable fund earnings

You became a resident of Australia for tax purposes on DDMMYY. During late 201X the lump sum payment from the IM Fund was transferred to your UK bank account prior to being transferred to your Australian bank account.

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) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 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 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).

Subsection 305-75(2) of the ITAA 1997 states, if you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

(ii) the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other *foreign superannuation fund during the period;

'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.

They are included in applicable fund earnings to the extent that they would have been included in assessable income under subsection 305-70(2) of the ITAA 1997 if they had originally been paid to Australia instead of being transferred to the 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 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 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.

For the transfer made from the IM Fund during late 201X, the exchange rate applicable to the transfer is the date on which the lump sum was made into Australia.

Previously exempt fund earnings - First transfer: UK Fund to IM Fund

As you became a member of the UK Fund before you became a resident of Australia, the growth will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

Since the UK Fund and the IM Fund are both foreign superannuation funds, these amounts are not assessable as per subsection 305-70(4) of the ITAA 1997. However, they will be classified as previously exempt fund earnings according to subsections 305-75(5) and 305-75(6) of the ITAA 1997 and hence included in the applicable fund earning calculations for the transfer from the IM Fund to you.

Transfer from IM Fund into Australia

As you became a member of the IM Fund after you became a resident of Australia, the growth in the fund will be worked out in accordance with subsection 305-75(2) of the ITAA 1997.

Scheme A - a proportionate approach is allowed

It is the Commissioner's view that where an individual commences a pension from the foreign superannuation fund at the same time as the superannuation lump sum is paid from the fund, subsection 305-75(2) 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. This is consistent with the Commissioner's view in 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.

As you received a lump sum amount that was a portion of your interest in the IM Fund, this proportion will be used to calculate the applicable fund earnings in relation to the lump sum amount received.

You also have an amount of previously exempt fund earnings in respect of the lump sum paid to you during late 201X. The previously exempt fund earnings attributable to this lump sum represent the amount that would have been included in your assessable income if you had personally been paid the lump sum when it was transferred from the UK Fund to the IM Fund.

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 = £xxx.

Therefore the 'applicable fund earnings' amount in respect of the lump sum amount transferred from the IM Fund that should be included in your assessable income for the 201X year of income is $xxx.