Edited version of private advice

Authorisation Number: 1052024339755

Date of advice: 5 May 2023

Ruling

Subject: Applicable fund earnings

Question 1

Is any part of the lump sum payment received by the Taxpayer from a Country A Registered Retirement Savings Plan (RRSP) assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the taxpayer entitled to a foreign income tax offset for income tax paid in Country A in respect of the lump sum?

Answer:

Yes.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer became a resident of Australia for tax purposes on or about DD MM YYYY (Residency Date).

While living in Country A, the Taxpayer accumulated an interest in an RRSP in a foreign superannuation fund.

The interest in the RRSP on DD MM YYYY was X Country A dollars (CAD).

The balance was approximately X CAD at about the time the Taxpayer moved back to Australia.

On DD MM YYYY, the superannuation balance of the Taxpayer's account was X CAD, consisting entirely of an interest in an RRSP account. The balance of the associated Pay As You Go (PAYG) account at that time was 0.00 CAD.

On DD MM YYYY, there was a disbursement of X CAD from the RRSP account to the PAYG account. The Country A authority withheld 25% tax on the transfer, due to the Taxpayer being a non-Country A resident.

On that date, the exchange rate was 1 AUD = 0.XXXX CAD.

The ratio of the withdrawal to the most recent balance was 0.172818.

On DD MM YYYY, the balance of the foreign fund account was X CAD.

On DD MM YYYY, an amount of X CAD was transferred from the Taxpayer's PAYG account to the Taxpayer's Australian bank account. An amount of X AUD was received in that account.

The value of the Taxpayer's interest on Residency Date is 0.172818 times CAD balance on DD MM YYYY.

There have been no contributions made into the foreign fund since the Taxpayer became a resident of Australia for tax purposes.

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 subsection 305(2)/(3)

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 section 770-70

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

Superannuation Industry (Supervision) Act 1993 subsection 10(1)

Reasons for decision

Question 1

Subdivision 305-B of the ITAA 1997 deals with superannuation lump sums paid from foreign superannuation funds.

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as being a superannuation fund that is not an Australian superannuation fund. A superannuation fund has the meaning given by subsection 10(1) of the Superannuation Industry (Supervision) Act 1993, which requires that the fund is a 'provident, benefit, superannuation or retirement fund'.

Where a lump sum 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 (AFE) in assessable income.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

In this case, the Taxpayer's fund is a foreign superannuation fund. The Taxpayer became an Australian resident after the start of the period to which the lump sum relates. 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 thatthe individual Taxpayer is only assessed on the income theyearned ontheirbenefits in the foreign fund whiletheywere 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.

An amount of applicable fund earnings may also include amounts of previously exempt fund earnings which occur where an amount in a foreign superannuation fund is transferred to another foreign superannuation fund before being received in Australia. These earnings would not otherwise be included and are set aside until the lump sum is transferred to the Taxpayer, or the Taxpayer's complying Australian superannuation fund.

The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained 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 (ATO ID 2015/7). 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.

Using an exchange rate of A$1 = 0.XXXX CAD as at DD MM YYYY, the 'applicable fund earnings' amount has been calculated in accordance with subsection 305-75(3) of the ITAA 1997.

The Taxpayer should include their applicable fund earnings of $X in their assessable income for the 2020-21 income year.

Question 2

A foreign income tax offset (FITO) is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.

Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

When claiming a FITO, a taxpayer is required to gross up their income for the foreign tax paid (or which is taken to have been paid) in respect of that income.

The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997).

The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source.

If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap.

In the Taxpayer's case, they are entitled to a FITO for the income tax withheld from the lump sum in Country A, limited to the amount to which they are entitled under section 770-10 of the ITAA 1997.