Edited version of private advice

Authorisation Number: 1051931105471

Date of advice: 17 February 2022

Ruling

Subject: Applicable fund earnings

Question

Is any part of the lump sum payment received by you from the pension scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Facts

You became a resident of Australia for taxation purposes in 20XX.

While living in the Country A, you became a member of the foreign fund.

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

There have been no transfers into the foreign fund since you became an Australian resident.

You received a lump sum payment from the foreign fund, paid into your Country A bank account in 20XX. This represented 25% of the total benefits in the fund and was tax free.

You commenced a pension from the foreign fund at the time of the lump sum withdrawal.

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

Reasons for decision

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

In your case,the pension schemeis a foreign superannuation fund. You became an Australian resident after the start of the period to which the lump sum relates.As you were not an Australian resident at all times during the period to which the lump sum relates, 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 thatyou are only assessed on the income you earned on your benefits in the foreign fund while you were 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.

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(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. 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 foreign fund, this proportion will be used to calculate the applicable fund earnings in relation to the lump sum amount received.

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 foreign fund the exchange rate applicable to the transfer is the date on which the lump sum was made into Australia.

Calculation

Amount of lump sum, as a proportion of total interest in the Country A Fund, vested in you on the day just before the residency date in 2002 = £pound;xxx (25% x £pound;xxx).

Lump sum payment in 2020 = £pound;xxx (25% x £pound;xxx)

Any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. In this case it is A$1 = £pound;0.xxxx using the Reserve Bank of Australia daily foreign exchange rates.

The estimated applicable fund earnings amount is AUD $xxx. You should include yourapplicable fund earnings in your assessable income.