Edited version of private advice

Authorisation Number: 1051768432470

Date of advice: 20 October 2020

Ruling

Subject: Lump sum payment from a foreign fund

Question

Is any part of the lump sum payment 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.

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Your client became a resident of Australia for taxation purposes more than 20 years ago.

Your client held an interest in a foreign pension scheme.

Your client was unable to provide the amount in the scheme that was vested in them at the date of Australian residency.

Your client was able to provide an amount that was vested in them at a particular date.

Your client could not access their benefits in the fund other than at retirement.

There have been no contributions into the foreign fund since your client became an Australian resident for tax purposes.

There have been no transfers into the foreign fund since your client became an Australian resident for tax purposes.

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

Your client no longer has an interest in the foreign fund.

Your client received a lump sum amount from the foreign fund in the 2018-19 income year.

You agreed to the Australian Taxation Office (ATO) calculating the amount vested in the scheme as at the date of your client's Australian residency.

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 Section 305-80

Income Tax Assessment Act 1997 Section 307-15

All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

A portion of the lump sum payment transferred from the foreign fund, must be included as 'applicable fund earnings' in your client's income tax return for the 2018-19 income year.

Detailed reasoning

If you receive a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, yourassessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while you were an Australian resident.

In this case, the fund is a foreign superannuation fund. Your client became an Australian resident after the start of the period to which the lump sum relates. They remained an Australian resident at all times until the lump sum was paid. Therefore, the applicable fund earnings is calculated in accordance with subsection 305-75(3)of the ITAA 1997.

The effect of section 305-75 of the ITAA 1997 is that your client is only assessed on the income earned on their benefits in the foreign fund while theywere an Australian resident. Earnings during periods of non-residency, contributions and transfers into the foreign fund are not taxable when the overseas benefit is paid.

The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum is not assessable income and not exempt income.

The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained 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. We use the exchange rate that applied when the taxpayer received the lump sum, to work out the Australian dollar equivalent for the amount in the foreign superannuation fund that was vested in the taxpayer on a certain date.

Yourclient'sapplicable fund earnings have been calculated in accordance with subsection 305-75(3)of the ITAA 1997.