Edited version of private advice

Authorisation Number: 1052054722802

Date of advice: 22 November 2022

Ruling

Subject: Applicable fund earnings - lump sum transfer from foreign fund

Question 1

Is any part of the lump sum payment received by the Taxpayer from a foreign fund 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 credit for the UK tax withheld from the lump sum payment?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

While living in a foreign country, the Taxpayer became a member of a foreign fund (UK Fund).

The taxpayer subsequently became a resident of Australia for taxation purposes.

There have been no contributions into the UK Fund since the Taxpayer became an Australian resident for tax purposes.

There have been no transfers into the UK Fund since the Taxpayer became an Australian resident for tax purposes.

A lump sum payment from the UK Fund was paid directly to the Taxpayer.

The Taxpayer does not know the value of the lump sum at the residency date. The value has been estimated using the UK Consumer Price Index (CPI).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 subsection 770-10(1)

Income Tax Assessment Act 1997 Section 770-15

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

Income Tax Assessment Act 1936 Section 27H

International Tax Agreements Act 1953 Section 4

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

Lump sum payments from foreign superannuation funds

If an individual taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, the Taxpayer's assessable income includes any growth (appliable fund earnings) earned on the foreign superannuation interest while the Taxpayer was an Australian resident.

In this case, the fund is a foreign superannuation fund. The Taxpayer became an Australian resident after the start of the period to which the lump sum relates. The Taxpayerremained an Australian resident at all times until the lump sum was paid. 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 isonly assessed on the income theyearned on theirbenefits 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 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.

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 = £pound;0.xxxx as at xx/xx/xxxx, 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 $xx,xxx,xx (calculated as shown in the table below) in their assessable income for the 2022 income year.

Therefore the 'applicable fund earnings' amount in respect of the lump sum amount transferred from the Fund that should be included in the Taxpayer's assessable income for the 2021-22 income year is $xx,xxx,xx.

Pension - assessable income

An Australian resident's assessable income will include ordinary and statutory income from all sources whether in or out of Australia (sections 6-5 and 6-10 of the ITAA 1997).

Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) provides that annuities and pensions paid from foreign superannuation funds or foreign pension schemes to provide superannuation benefits are included in assessable income.

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'.

The fund in this case meets the definition of a superannuation fund. As it is not an Australian superannuation fund, it is considered a foreign superannuation fund.

Accordingly, the pension is assessable income in accordance with section 27H of the ITAA 1936.

In determining an individual's liability to pay tax in Australia it may also be necessary to consider the operation of any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

The Convention between Australia and the UK (the UK Convention) operates to avoid the double taxation of Australian and UK residents.

Article 17 of the UK Convention provides that a pension will only be taxable in the country of residence of the recipient.

Accordingly, the pension the Taxpayer receives from the foreign fund is taxed only in Australia under Article 17 of the UK Convention and is assessable in Australia under section 27H of the ITAA 1936.

The pension payments are to be included at label L in Question 20 of the Supplementary section of the tax return.

Foreign Income Tax Offset

Subsection 770-10(1) of theITAA 1997 provides for a foreign income tax offset for an income tax year for foreign income tax paid in respect of an amount that is included in assessable income.

Section 770-15 of the ITAA 1997 defines 'foreign income tax' to include a tax on income that is imposed by a law other than an Australian law.

A note to section 770-15 of the ITAA 1997 points out that 'foreign income tax' includes only that which has been correctly imposed under the foreign law, and where the foreign jurisdiction has a tax treaty with Australia under the Agreements Act, foreign income tax includes only tax which has been correctly imposed under the treaty.

Article 22(1) of the UK Convention confirms that a tax credit is only allowed against Australian tax for UK tax paid if the UK tax is paid in accordance with the Convention.

In this case, UK tax was withheld from the pension the Taxpayer received from the foreign fund. However, we consider that the Convention does not allow the UK to tax the pension and it should only be taxed in Australia.

Therefore, the UK tax paid on the pension was not paid in accordance with the UK Convention and a foreign income tax offset is not allowable in Australia for the tax paid.