Edited version of private advice

Authorisation Number: 1052015760111

Date of advice: 11 October 2022

Ruling

Subject: Payments from foreign funds

Question 1

Is your client entitled to an UPP deductible amount in respect of their pension from Foreign Fund 1?

Answer

Yes.

Question 2

Is any part of the payment from Foreign Fund 1 applicable fund earnings under section 305 75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

The Commissioner declines to rule.

Question 3

Is your client entitled to an UPP deductible amount in respect of their pension from Foreign Fund 2?

Answer

Yes.

Question 4

Is any part of the payment from Foreign Fund 2 applicable fund earnings under section 305 75 of the ITAA 1997?

Answer

Yes.

Question 5

Is any part of payment 1 from Foreign Fund 3 applicable fund earnings under section 305 75 of the ITAA 1997?

Answer

Yes.

Question 6

Is any part of payment 2 from Foreign Fund 3 applicable fund earnings under section 305 75 of the ITAA 1997?

Answer

Yes.

This private ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your client became an Australian resident for tax purposes in the 20XX-XX income year.

Foreign Fund 1

Your client became a member of Foreign Fund 1 in 19XX.

Upon reaching their 60th birthday in the 20XX-XX income year your client received a lump sum and received a monthly pension for the rest of their life, transferrable to their spouse on their death.

Foreign Fund 1 does not allow for access of benefits prior to retirement age

Pension - Foreign Fund 1

Your client commenced a pension/annuity with Foreign Fund 1 in the 20XX-XX income year.

You have provided the exact amount of personal contributions made to Foreign Fund 1.

You have provided the annual amount of your client's pension paid from Foreign Fund 1 in the first year.

Your client receives a monthly pension from Foreign Fund 1.

The Foreign Fund 1 pension is a reversionary pension.

Your client's spouse will receive a percentage of the pension from Foreign Fund 1 upon your client's death.

Lump sum payment - Foreign Fund 1

In the 20XX-XX income year, your client received a lump sum payment from Foreign Fund 1.

No amounts have been transferred into Foreign Fund 1 from any other foreign fund since your client became an Australian resident.

No contributions made by your client and your client's employer to Foreign Fund 1 since they became an Australian resident.

Foreign Fund 2

Your client became a member of Foreign Fund 2 in 19XX.

Foreign Fund 2 does not allow for access of benefits prior to retirement age.

Pension - Foreign Fund 2

Your client commenced a pension/annuity with Foreign Fund 2 in the 20XX-XX income year.

You have provided that the exact amount of personal contributions made to Foreign Fund 2.

You have provided the annual amount of your client's pension from Foreign Fund 2 in the first year.

Your client receives a monthly pension from Foreign Fund 2.

Your client's spouse will receive a percentage of the pension from Foreign Fund 2 upon your client's death.

Lump sum payment - Foreign Fund 2

Your client took the maximum amount allowable as a lump sum from Foreign Fund 2.

Your client received a lump sum payment from Foreign Fund 2 in the 20XX-XX income year.

You have provided the value of your client's entitlement in Foreign Fund 2 on the day before your client became an Australian resident for tax purposes.

No amounts have been transferred into Foreign Fund 2 from any other foreign fund since your client became an Australian resident.

No contributions made by your client and your client's employer into Foreign Fund 2 since they became an Australian resident.

Foreign Fund 3

Your client became a member of Foreign Fund 2 in 19XX.

Foreign Fund 3 does not allow for access of benefits prior to retirement age.

Lump sum payment - Foreign Fund 3

You have provided the value of your client's entitlements in Foreign Fund 3 just before the date your client became an Australian resident.

Your client received lump sum payment 1 from Foreign Fund 3 in the 20XX-XX income year.

You have provided that the total value of your client's benefits in Foreign Fund 3 just prior to the payment of lump sum payment 1.

You have provided the value of your client's benefits in Foreign Fund 3 just after the payment of the lump sum payment 1.

Your client received a lump sum payment 2 from Foreign Fund 3 in the 20XX-XX income year.

No amounts have been transferred into Foreign Fund 3 from any other foreign fund since your client became an Australian resident.

No contributions made by your client and your client's employer into Foreign Fund 3 since they became an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1936 Former subsection 27A(1)

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1936 Subsection 27H(2)

Income Tax Assessment Act 1936 Subsection 27H(3)

Income Tax Assessment Act 1936 Subsection 27H(4)

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 (1936 Act) Regulation 2015 Section 9

Income Tax Assessment (1997 Act) Regulations 2021 Section 960-50.01

Taxation Administration Act 1953 Section 357-110

Issue

Question 1

Detailed reasoning

Pension: Foreign Fund 1

The part of your annual pension or annuity income which represents a return to you of your personal contributions is free from tax. The tax-free portion is called the UPP deductible amount.

It is calculated by dividing the UPP of your pension by either the term of the pension (if fixed), or a life expectancy factor - that applies to you or your spouse if they have a greater life expectancy - according to life expectancy statistics.

The Australian life tables are published by the Australian Government Actuary, and the life expectancy is taken from when the pension first became payable.

The annual UPP deductible amount is calculated using the following formula:

A = relevant share of the pension payable to your client

(if all the pension is payable to you then A = 1)

B = is the amount of the UPP of the pension

C = is the residual capital value (if any)

D = is the relevant number

Conclusion

As per the above determination, your client's annual UPP deductible amount for Foreign Fund 1 is $x.

The UPP deductible amount for the full financial year will remain the same provided the details relating to the UPP determination remain unchanged.

Question 2

Detailed reasoning

You have requested a private ruling as to whether any part of the lump sum payment from Foreign Fund 1 is applicable fund earnings under section 305 75 of the Income Tax Assessment Act 1997 (ITAA 1997).

Under subsection 357-105(2) of Schedule 1 to the Taxation Administration Act 1953, the Commissioner may decline to make a private ruling where the Commissioner has requested further information and the applicant has not provided this information within a reasonable time.

In this case, the Commissioner declines to rule as the information requested in relation to the value of the lump sum payment from Foreign Fund 1 as at the date your client became an Australian tax resident has not been provided within the timeframe required.

Question 3

Detailed reasoning

Pension: Foreign Fund 2

The part of your annual pension or annuity income which represents a return to you of your personal contributions is free from tax. The tax-free portion is called the UPP deductible amount.

It is calculated by dividing the UPP of your pension by either the term of the pension (if fixed), or a life expectancy factor - that applies to you or your spouse if they have a greater life expectancy - according to life expectancy statistics.

The Australian life tables are published by the Australian Government Actuary, and the life expectancy is taken from when the pension first became payable.

The annual UPP deductible amount is calculated using the following formula:

A = relevant share of the pension payable to your client

(if all the pension is payable to you then A = 1)

B = is the amount of the UPP of the pension

C = is the residual capital value (if any)

D = is the relevant number

Conclusion

As per the above determination, your annual UPP deductible amount is $x for Foreign Fund 2 in the 20XX-XX income year. Your client's annual UPP deductible amount is $x for Foreign Fund 2 in the 20XX-XX income year and following income years.

The UPP deductible amount for the full financial year will remain the same provided the details relating to the UPP determination remain unchanged.

Question 4

Summary

The lump sum payment from Foreign Fund 2 is taxed in Australia as a lump sum payment pursuant to section 305-70 of the ITAA 1997. The 'applicable fund earnings' amount in respect of the payment is $x.

Detailed reasoning

Lump sum payments received from certain foreign superannuation funds

Subdivision 305-B of the 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.

Your client became a resident of Australia for tax purposes in the 20XX-XX income year. As the lump sum payment was made more than six months after your client became an Australian resident, section 305-70 of the ITAA 1997 applies to the payment so that an amount of applicable fund earnings (if any) is included in their assessable income for the 20XX-XX income year.

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As your client 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 your client is assessed only on the income they earned on their benefits in Foreign Fund 2 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.

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 Foreign Fund 2 should be calculated by deducting the Australian dollar equivalent of the amount vested in your client just before the Residency Date from the amount vested in your client 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

The calculation of the applicable fund earnings for your client is shown in the tables below with reference to the facts of the case. Any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt from Foreign Fund 2.

Therefore, the 'applicable fund earnings' amount in respect of the lump sum payment transferred from Foreign Fund 2 that should be included in your client's assessable income for the 20XX-XX income year is $x.

Question 5

Summary

Lump sum payment 1 from Foreign Fund 3 taxed in Australia as a lump sum payment pursuant to section 305-70 of the ITAA 1997. The 'applicable fund earnings' amount in respect of the payment is $x.

Detailed reasoning

Lump sum payments received from certain foreign superannuation funds

Subdivision 305-B of the 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.

Your client became a resident of Australia for tax purposes in the 20XX-XX income year. As lump sum payment 1was made more than six months after they became an Australian resident, section 305-70 of the ITAA 1997 applies to the payment so that an amount of applicable fund earnings (if any) is included in their assessable income for the 20XX-XX income year.

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As your client 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 your client is assessed only on the income they earned on their benefits in Foreign Fund 3 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.

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 Foreign Fund 3 should be calculated by deducting the Australian dollar equivalent of the amount vested in your client just before the Residency Date from the amount vested in your client 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

Therefore, the 'applicable fund earnings' amount in respect of lump sum payment 1 transferred from Foreign Fund 3 that should be included in your client's assessable income for the 20XX-XX income year is $x.

However, subsection 305 70(2) of the ITAA 1997 states that only so much of the lump sum as equals the applicable fund earnings is included in assessable income. Therefore, the assessable income will be limited to the amount of the lump sum in any case where the lump sum is less than the applicable fund earnings.

Accordingly, the amount included as assessable income for this lump sum payment 1 is $x. This should be included in your client's assessable income for the 20XX-XX income year.

Question 6

Summary

Lump sum payment 2 from Foreign Fund 3 is taxed in Australia as a lump sum payment pursuant to section 305-70 of the ITAA 1997. The 'applicable fund earnings' amount in respect of the payment is $x.

Detailed reasoning

Lump sum payments received from certain foreign superannuation funds

Subdivision 305-B of the 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.

Your client became a resident of Australia for tax purposes in the 20XX-XX income year. As the lump sum payment 2 was made more than six months after your client became an Australian resident, section 305-70 of the ITAA 1997 applies to the payment so that an amount of applicable fund earnings (if any) is included in their assessable income for the 20XX-XX income year.

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As your client 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 your client is assessed only on the income they earned on their benefits in Foreign Fund 3 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.

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 Foreign Fund 3 should be calculated by deducting the Australian dollar equivalent of the amount vested in your client just before the Residency Date from the amount vested in your client 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

Therefore, the 'applicable fund earnings' amount in respect of lump sum payment 2 transferred from Foreign Fund 3 that should be included in your client's assessable income for the 20XX-XX income year is $x.