Edited version of private advice

Authorisation Number: 1052286738212

Date of advice: 21 August 2024

Ruling

Subject: Applicable fund earnings

Question 1:

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

Answer:

Yes, the applicable fund earnings are $XXXX.

Question 2:

Can the Taxpayer claim a foreign income tax offset for tax paid in the foreign country in relation to the lump sum payment under subsection 770-10(1) of the ITAA 1997?

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 taxation purposes on DD MM YYYY.

•                     While living overseas, the Taxpayer became a member of the foreign fund.

•                     The foreign fund confirmed the value of the benefits at the residency date was XXXX (foreign currency).

•                     On DD MM YYYY the amount vested in the foreign fund was XXXX (foreign currency).

•                     On DD MM YYYY, the Taxpayer received a lump sum payment of XXXX (foreign currency) from the foreign fund into their foreign bank account.

•                     Tax amount of XXXX (foreign currency) was withheld by the foreign fund.

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

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

•                     The exchange rate on DD MM YYYY was AUD 1 = foreign currency.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 section 305-80

Income Tax Assessment Act 1997 section 960-50

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

Income Tax Assessment Act 1997 subsection 770-10

Reasons for decision

Question 1: Is any part of the lump sum payment received by the Taxpayer from the foreign fund assessable as applicable fund earnings under section 305-70 of the ITAA 1997?

Detailed reasoning:

Summary:

A portion of the lump sum payment transferred from the foreign fund, must be included as 'applicable fund earnings" in the Taxpayer's income tax return for the year 20XX-XX income year. The assessable applicable fund earnings are calculated as $XXXX (rounded).

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, then broadly, the earnings 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 in, relation to a lump sum paid from a foreign superannuation fund, under either subsection 305-75(2) or subsection 305-75(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 the Taxpayer became an Australian resident. As the Taxpayer was 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 that if you become an Australian resident after the start of the period to which the lump sum relates (but before you receive it), 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).

•                     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.

Foreign currency conversion

•                     The foreign currency translation rules for lump sums paid by 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).

•                     For the purposes of working out the applicable fund earnings in relation to a superannuation lump sum under section 305-75 of the ITAA 1997, the correct rule for translating foreign currency into Australian dollars is the rule described in Item 11A of the table in subsection 960-50(6) of the ITAA 1997 (as modified by regulation 960-50.01(1) of the Income Tax Assessment (1997 Act) Regulations 2021).

•                     This means 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 directly by the Taxpayer or the Taxpayer's complying superannuation fund. Specifically, under subsection 960-50(4) of the ITAA 1997, each amount or component that is denoted in a foreign currency must be translated into an Australian dollar equivalent first before any calculations are undertaken.

•                     As the Taxpayer became a member of the Fund before they 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 XX$ are translated into Australian dollars using the exchange rate applicable on the date of receipt. Based on data extracted from Reserve Bank of the foreign country, the relevant exchange rate on DD MM YYYY was AUD 1 = .XXX (foreign currency).

•                     Accordingly, the Taxpayer should include their applicable fund earnings of $XXXX (rounded and calculated as shown in the table below) in their assessable income for the 20XX-XX income year.

Question 2: Can the Taxpayer claim a foreign income tax offset for tax paid in the foreign country in relation to the lump sum payment under subsection 770-10(1) of the ITAA 1997?

Detailed reasoning:

Assessable income

•                     Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

•                     In determining liability to Australian tax on foreign sourced income received by a resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable Double Tax Agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

•                     Section 4 of the Agreements Act incorporates that Act with the Income 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).

•                     Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law.

•                     The double taxation agreement between Australia and foreign country is contained within the Convention between Australia and foreign country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the foreign country convention).

•                     Article 21 of the foreign country convention deals with income not expressly mentioned in the convention and states:

-               Subject to the provisions of paragraph 2, items of income of a resident of one of the Contracting States which are not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that Contracting State.

-               However, if such income is derived by a resident of one of the Contracting States from sources in the other Contracting State, such income may also be taxed in the Contracting State in which it arises and subject to paragraph 3, according to the law of that State.

-               Where the income is income derived from an estate or trust resident in foreign country by a resident of Australia the foreign country tax on that income shall not exceed 15 per cent of the gross amount of the income if it is subject to tax in Australia.

Foreign income tax Offset

•                     Subdivision 770-A of the ITAA 1997 sets out the rules for claiming a foreign income tax offset (FITO).

•                     To be entitled to FITO under subsection 770-10(1) of the ITAA 1997, the following requirements must be met:

-               The tax offset must be for an amount of a foreign income tax

-               The taxpayer must have 'paid' an amount of foreign income tax; and

-               The income or gain on which the taxpayer paid foreign income tax must be paid in respect of an amount included in the taxpayer's assessable income for the income year.

•                     To count towards a tax offset, the foreign income tax must have been paid on income, profits or gains that are included in your income for Australian income tax purposes. There must be a nexus between the payment of the foreign income tax and the tax liability of the taxpayer.

•                     The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset.

There is a limit on the amount of the tax offset for a year (section 770-75 of the ITAA 1997). If the Taxpayer claims an offset of $1,000 or less, the Taxpayer only needs to record the actual amount of foreign income tax paid that counts towards the offset. If the Taxpayer claims more than $1,000, they will have to work out their foreign income tax offset limit. The Taxpayer can find more information about how to do this on our website, searching for a Quick Code QC 72280.