Edited version of private advice

Authorisation Number: 1051940006243

Date of advice: 18 January 2022

Ruling

Subject: Lump sum transfer from a foreign superannuation fund

Question

Is any part of the lump sum payment that would be received by the Taxpayer from a foreign pension plan 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 ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The Taxpayer is over 55 years of age.

While overseas the Taxpayer became a member of an overseas fund, the Pension Scheme 1.

While overseas the Taxpayer became a member of an overseas fund, the Pension Scheme 2.

The Taxpayer became an Australian tax resident on during the 20XX-XX income year.

You have provided external legal advice which outlines calculations for balances in the Pension Scheme 1 and the Pension Scheme 2 as at the date the Taxpayer became an Australian tax resident.

During the 20XX-XX income year, the Taxpayer transferred their entire balance in the Pension Scheme 1, to another overseas fund, the Pension Plan.

During the 20XX-XX income year, the Taxpayer transferred their entire balance in the Pension Scheme 2, to the Pension Plan.

The Taxpayer is over 55 years of age and plans to transfer the balance in the Pension Plan to himself personally or a complying Australian Super Fund.

A recent statement shows that balance in the Pension Plan.

No contributions have been made into the Pension Plan after the Taxpayer became an Australian tax resident.

Monies in the Pension Scheme 1, the Pension Scheme 2 and the Pension Plan are secured until normal retirement age or death.

No amounts have been transferred into the Pension Scheme 1, the Pension Scheme 2 and the Pension Plan from other foreign superannuation funds after the Taxpayer became a resident of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-55

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 section960-50

Income Tax Assessment Act 1997 subsection960-50(1)

Income Tax Assessment Act 1997 subsection960-50(4)

Taxation Administration Act 1953 Section 357-110

Reasons for decision

Summary

A portion of the lump sum payment to be transferred from the Pension Plan should be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the income year in which the transfer is made.

The Taxpayer may however be eligible to make an election to have all or part of the applicable fund earnings treated as assessable income of their complying Australian superannuation fund.

Detailed reasoning

Lump sum payments received from certain foreign superannuation funds

Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) deals with superannuation benefits paid from foreign superannuation funds.

Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income. That is, it is tax-free (sections 305-60 of the ITAA 1997).

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income.

In this case, the facts show the Taxpayer became a resident of Australia for tax purposes on during the 2013-14 income year (the residency date) and that the Taxpayer intends to transfer the balance in the Pension Plan to himself personally or a complying Australian Super Fund. Accordingly, as the lump sum will be received more than six months after the Taxpayer became an Australian resident, a portion of the lump sum will be assessable under section 305-70 of the ITAA 1997.

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As the Taxpayer became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings are worked out in accordance with subsection 305-75(3) of the ITAA 1997 which 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).

The effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the Pension Scheme 1, the Pension Scheme 2 and the Pension Plan during the relevant period. Earnings made during periods of non-residency, contributions, and transfers into the paying fund do not form part of the taxable amount when the benefit is paid.

The Taxpayer has yet to transfer their benefits from the Pension Plan. Until that transfer takes place, we are unable to advise you of the actual figure to be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the income year in which the transfer is made. However, we will show you how the applicable fund earnings are calculated by using the transfer value of the Taxpayer's benefits as at the date of the latest statement. Please note that should the relevant amounts change (i.e. the lump sum actually received and/or exchange rate that applies on the date when the lump sum is received) then the applicable fund earnings will need to be recalculated.

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.

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 Plan should be calculated by deducting the Australian dollar equivalent of the amount vested in the Taxpayer just before the Residency Date from the amount vested in the Taxpayer on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt.

Transfer from the Pension Scheme 1 to the Pension Plan

In accordance with subsection 305-70(4) of the ITAA 1997, the amount transferred from the Pension Scheme 1 to the Pension Plan is not assessable income and is not exempt income of the Taxpayer. However, the applicable fund earnings amount is counted as 'previously exempt fund earnings' for the purposes of calculating the applicable fund earnings amount in respect of the transfer from the Pension Plan to Australia.

Transfer from the Pension Scheme 2 to the Pension Plan

In accordance with subsection 305-70(4) of the ITAA 1997, the amount transferred from the Pension Scheme 2 to the Pension Plan is not assessable income and is not exempt income of the Taxpayer. However, the applicable fund earnings amount is counted as 'previously exempt fund earnings' for the purposes of calculating the applicable fund earnings amount in respect of the transfer from the Pension Plan to Australia.

Transfer of balance from the Pension Plan to Australian

The 'applicable fund earnings' amount in respect of the lump sum payment transferred from the Pension Plan that should be included in the Taxpayer's assessable income for the 20XX-XX income year had the lump sum been transferred during the 20XX-XX income year.

Please note that the Taxpayer will need to recalculate the applicable fund earnings with the relevant amounts for the actual date when the lump sum is received.

Election

According to section 305-80 of the ITAA 1997, a taxpayer who is transferring their overseas superannuation benefits directly to an Australian complying superannuation fund is able to elect to have the Australian superannuation fund pay the tax on the applicable fund earnings if the taxpayer no longer has an interest in the overseas fund immediately after the payment

If the Taxpayer no longer has an interest in the Pension Plan, they will be eligible to make the election in relation to the lump sum transfer.

If an election is made, the elected amount will be assessable to the superannuation fund and subject to tax at 15% rather than being assessable to the Taxpayer and subject to tax at the Taxpayer's marginal tax rate.