Edited version of private advice

Authorisation Number: 1051853443367

Date of advice: 8 July 2021

Ruling

Subject: Taxation of lump sum payment from foreign superannuation fund

Question

Is any part of the lump sum payments received by you from the foreign pension schemes 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 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

You migrated to Australia and became a resident of Australia for taxation purposes in the 2004-2005 income year (Residency Date).

While living overseas, you became a member of two Overseas Pension Schemes; Pension Scheme 1 and Pension Scheme 2.

You were unable to access the benefits in either pension scheme prior to retirement.

You have provided the amount vested in each Pension Scheme on the Residency Date.

You have not made any contributions to either scheme since becoming a resident of Australia.

In the 2020-21 income year you transferred an amount from Pension Scheme 1 into an Australian Superannuation Fund (the Australian Fund).

In the 2020-21 income year, you transferred an amount from Pension Scheme 2 into the Australian Fund.

You no longer have an interest remaining in either scheme.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 305-B

Income Tax Assessment Act 1997 section 305-60

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 305-80(1)

Income Tax Assessment Act 1997 subsection 305-80(2)

Income Tax Assessment Act 1997 section 960-50

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

Reasons for decision

Summary

The 'applicable fund earnings' amount in respect of the lump sum you received from Pension Scheme 1 is an amount.

The 'applicable fund earnings' amount in respect of the lump sum you received from Pension Scheme 2 is an amount.

You can make an election under section 305-80 of the ITAA 1997 to have any part of the applicable fund earnings from each Pension Scheme included in the assessable income of the Australian Fund because immediately after the payments of the relevant amounts, you no longer had an interest in the Pension Schemes.

Detailed reasoning

The tax treatment of lump sums received from certain foreign superannuation funds is set out in subdivision 305-B of the ITAA 1997.

If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable income.

In this case, based on the information provided, the UK Pension Schemes are considered to be foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

Additionally, as you received the lump sum payments more than six months after your date of residency, section 305-70 of the ITAA 1997 applies to the lump sums received to include the amount of applicable fund earnings (if any) in respect of the lump in your assessable income for the 2020-21 income year.

Applicable fund earnings

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 becomes an Australian resident after the start of the period to which the lump sum relates.

As you became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings is worked out in accordance with subsection 305-75(3) of the ITAA 1997. This provision states:

If you become an Australian resident after the start period to which the lump sum relates, (but before you received it) 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 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).

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

The effect of section 305-75 of the ITAA 1997 is that you are assessed only on the income earned on benefits in the Overseas Pension Schemes during the residency period. Earnings made during periods of non-residency, and contributions and transfers into the Overseas Pension Schemes, do not form part of the taxable amount when the lump sum 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 (A$). 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: Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997 (ATO ID 2015/7), the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of the lump sum received from the Pension Schemes should be calculated by deducting the Australian dollar equivalent of the amount vested in you just before the residency date from the amount vested in you on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt.

Calculation of the applicable fund earnings amount- transfer from Pension Scheme 1 to the Australian Fund

The calculation of the applicable fund earnings amount in respect of the lump sum you received from Pension Scheme 1 is shown in the table below. As discussed, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt.

Therefore, the 'applicable fund earnings' amount in respect of the lump sum payment you received from Pension Scheme 1 that should be included in your assessable income for the 2020-21 income year is an amount.

Calculation of the applicable fund earnings amount- transfer from Pension Scheme 2 to the Australian Fund

The calculation of the applicable fund earnings amount in respect of the lump sum you received from Pension Scheme 2 is shown in the table below. As discussed, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt.

Therefore, the 'applicable fund earnings' amount in respect of the lump sum payment you received from Pension Scheme 2 that should be included in your assessable income for the 2020-21 income year is an amount.

Election under section 305-80 of the ITAA 1997

A person may choose to have a superannuation lump sum from a foreign superannuation fund transferred to a complying superannuation fund rather than being paid directly to the person. In such a case, the person may elect under section 305-80 of the ITAA 1997 for all or part of their applicable fund earnings amount to be included in the assessable income of the complying superannuation fund.

However, the choice can only be made if the conditions in subsection 305-80(1) of the ITAA 1997 are satisfied, that is if:

•                the person is taken to have received the lump sum under section 307-15 of the ITAA 1997;

•                whole of the lump sum is paid directly from the foreign superannuation fund into a complying superannuation fund; and

•                the person no longer has an interest in the foreign superannuation fund immediately after the lump sum is paid.

A person is taken to have received a payment under section 307-15 of the ITAA 1997 if it is made:

•                for the person's benefit; or

•                to another person or to an entity at the person's direction or request.

In this case, you have received the lump sum under section 307-15 of the ITAA 1997 because it was transferred to the Australian Fund at your request. You no longer have an interest remaining in either of your overseas funds.

Therefore, you can make an election under section 305-80 of the ITAA 1997 to have any part of the applicable fund earning included in the assessable income of the Australian Fund.