Edited version of private advice

Authorisation Number: 1052062765680

Date of advice: 13 December 2022

Ruling

Subject: Lump sum transfer from foreign fund

Question 1

Is any part of the lump sum payment received from Fund A assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is a pension received from Fund A assessable in accordance with section 27H of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

While living overseas, the Taxpayer became a member of Fund A.

Fund A is a defined benefits foreign fund.

The Taxpayer became a resident of Australia for tax purposes more than 30 years ago.

The Taxpayer was unable to provide the amount in Fund A that was vested in the Taxpayer on the day before their Australian residency.

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

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

The Taxpayer received a lump sum payment from Fund A in the 20XX-XX income year.

The Taxpayer also received a lump sum in arrears amount in the 20XX-XX income year representing pension arrears for a prior seven year period.

Assumptions

The Taxpayer agreed to estimating the value at residency in Fund A and Fund B using the Country A Retail Price Index (RPI) and Consumer Price Index (CPI) for the purposes of calculating previously exempt fund earnings.

Fund A is a scheme for the payment of benefits in the nature of superannuation upon retirement or death.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

A portion of the lump sum payment received from Fund A must be included as 'applicable fund earnings' in assessable income for the 2020-21 income year. The assessable applicable fund earnings is calculated as $X.

The foreign pension derived by the taxpayer is assessable income and must be declared as assessable income in the income year received.

Detailed reasoning

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 (applicable fund earnings) earned on the foreign superannuation interest while the taxpayer was an Australian resident.

In this case, Fund A is a foreign superannuation fund. The Taxpayer became an Australian resident after the start of the period to which the lump sum relates. The Taxpayer remained 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 that the individual taxpayer is only assessed on the income they earned on their benefits in the foreign fund while they were 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.

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.

The amount of applicable fund earnings in relation to the lump sum payment received from Fund A has been calculated in accordance with the formula in subsection 305-75(3) of the ITAA 1997.

Question 2

Detailed reasoning

Australian residents are taxed on their worldwide income. That is, they must declare all income received from Australian and foreign sources in their income tax return.

Section 27H of the ITAA 1936 operates to specifically include in assessable income, the amount of any pension derived by a taxpayer during a year of income reduced by the annual deductible amount.

The deductible amount is considered to be a return of part of the contributions that were made towards the purchase price of the pension and is calculated based on the undeducted purchase price of that pension.

In this case, a foreign pension received from the Country A is assessable income in accordance with section 27H of the ITAA 1936. As there were no contributions, there is no deductible amount.