Edited version of private advice

Authorisation Number: 1052038048296

Date of advice: 21 October 2022

Ruling

Subject: Foreign fund transfers

Question 1

Will any part of the first lump sum benefit payment be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the applicable fund earnings on the second lump sum payment nil?

Answer

Yes.

Question 3

Where the Taxpayer receives a third and a final fourth payment from the UK Fund, will the payments from the scheme be taxed in Australia as lump sum payments pursuant to section 305-70 of the ITAA 1997?

Answer

Yes.

Question 4

Is there applicable fund earnings on the third lump sum payment?

Answer

Yes.

Question 5

With regard to the second and subsequent lump sum payments, is the start date for applicable fund earnings calculation for the next lump sum, the day after the payment was made as per subparagraph 305-75(3)(a)(i) and subsection 305-75(4) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

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

You are a member of a United Kingdom (UK) Fund.

The source of money in the UK Fund was a transfer from another UK pension scheme prior to you becoming an Australian resident.

The first withdrawal from the UK Fund was paid directly to you as a pension commencement lump sum (PCLS).

The second withdrawal from the UK Fund was paid directly to you as a PCLS.

The third withdrawal was paid directly to you as a drawdown payment.

The UK Fund is a UK registered pension scheme.

Assumptions

You intend to transfer your total benefits from the UK Fund to Australia during the 20XX year of income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

We followed these ATO view documents

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

Reasons for Decision

Applicable fund earnings

When a person receives a lump sum from a foreign superannuation fund more than six months after they became an Australian resident, the growth they earned on their foreign superannuation during the period when they were a resident of Australia is included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997.

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 was not an Australian resident at all times during the period to which the lump sum relates.

In this case, the fund to which the lump sum relates, was established before you became an Australian resident. As you were not an Australian resident at all times during the period, subsection 305-75(3) of the ITAA 1997 will apply.

Subsection 305-75(3) of the ITAA 1997 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 earningsis 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 only the income earned in respect of the foreign superannuation fund since Australian residency, less any contributions made in that period, is assessed. Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the lump sum 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 super fund is transferred to another foreign super fund before being received in Australia. These earnings would not otherwise be included and are set aside until the lump sum is transferred to you, or your complying Australian super fund.

Subsection 305-75(4) of the ITAA 1997 is relevant for calculating the applicable fund earnings where multiple lump sums have been paid to you from the same foreign fund:

If the lump sum is not the first lump sum from the fund you have received to which this section applies, for subsections (2) and (3) the start day is the day after you received the most recent such lump sum.

Foreign currency conversion

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). 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. This will be the time when you transfer your benefits to Australia.

First transfer

As you became a member of the UK Fund before you became a resident of Australia, the growth will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = £pound;0.xxxx.

The 'applicable fund earnings' amount in respect of the £pound;xxx lump sum payment transferred from the Fund is £pound;xxx.

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.

Second transfer

1.    As you became a member of the UK Fund before you became a resident of Australia, the growth will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

2.    As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = £pound;0.xxxx.

The 'applicable fund earnings' amount in respect of the £pound;xxx lump sum payment transferred from the Fund is £pound;xxx.

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.

Third transfer

3.    As you became a member of the UK Fund before you became a resident of Australia, the growth will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

4.    As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = £pound;0.xxxx.

The 'applicable fund earnings' amount in respect of the £pound;xxx lump sum payment transferred from the Fund is £pound;xxx.

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.

Future transfer

As you became a member of the UK Fund before you became a resident of Australia, the growth will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

However, as stated above this will not occur until your benefits are transferred from the UK Fund to Australia.