Edited version of private advice

Authorisation Number: 1052205399837

Date of advice: 19 December 2023

Ruling

Subject: International income

Question 1

Is the lump sum payment from a XXX fund taxable income in Australia?

Answer

Yes.

Question 2

Is the tax paid amounts in the XXX included when calculating the applicable fund earnings?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were born in XXX and moved to Australia permanently in XXX and is a resident for tax purposes since then.

While living in XXX, you became a member of a foreign fund.

You were required to close your pension account in XXX and withdraw the balance, so the money will be paid to you in a lump sum.

The XXX amount consists of a tax-free component of XXX and an income component of XXX.

The XXX tax withheld from your income component was XXX and the XXX revenue authority refunded you XXX of the tax withheld.

At the time of payment you were over 60 years of age and retired.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 subsection 960-50

International Tax Agreements Act 1953

Reasons for decision

Question 1

Is the lump sum payment from a XXX fund taxable income in Australia?

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Assessable income consists of ordinary income and statutory income provided it is neither exempt nor non-assessable non-exempt income.

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable DTA.

Section 4 of the International Tax Agreements Act 1953 (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 ITAA 1997 where there are inconsistent provisions (except in some limited situations).

The XXX Convention does not have an Article that specifically deals with lump sum payments from superannuation funds. This means that Article XXX of the XXX Convention dealing with 'Other Income" will apply. In accordance with Article XXX of the XXX Convention the lump sum payment is taxable in Australia.

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 XXX fund is a foreign superannuation fund. You became an Australian resident after the start of the period to which the lump sum relates. You remained an Australian resident at all times until the lump sum was paid. Therefore, the applicable fund earnings are calculated in accordance with subsection 305-75(3) of the ITAA 1997.

Question 2

Is the tax paid in the XXX on the lump sum amount included when calculating the applicable fund earnings?

Detailed reasoning

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 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).

Section b) in the above calculation for applicable fund earnings explains before any deduction for foreign tax, therefore, the tax is included in the calculation.

Foreign Currency

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.

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, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. 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.