Private ruling: Lump sums received from certain foreign superannuation funds
Date of advice: 13 September 2016
Published: November 2016
Ruling period: Income year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is any part of the lump sum benefit you received from an overseas retirement fund (the Foreign Fund) assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You immigrated to Australia from an overseas country and became an Australian resident for tax purposes in the relevant income year. Prior to migrating to Australia, you became a member of several retirement funds. After becoming an Australian resident, your overseas retirement funds were consolidated into a single account in the Foreign Fund. In the 2015-16 income year, your entire benefits in the Foreign Fund were transferred to a complying superannuation fund in Australia (the Australian Fund). You no longer have an interest in the Foreign Fund. You could not access benefits in any of the overseas retirement funds before retirement age. Since you became a resident of Australia, no contributions have been made into the overseas retirement funds. The Foreign Fund is a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 305-B | Income Tax Assessment Act 1997 section 305-70. | Income Tax Assessment Act 1997 section 305-80 | Income Tax Assessment Act 1997 section 960-50.

Reasons for decision: Summary: An amount should be included in your tax return for the 2015-16 income year as assessable 'applicable fund earnings' in respect of the lump sum benefit received from the Foreign Fund. You may however, make an election to have all or part of the applicable fund earnings amount treated as assessable income of the Australian Fund instead. | Detailed Reasoning - Lump sum payments received from certain foreign superannuation funds: Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds. Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income. That is, it is tax-free. It (sections 305-60 of the ITAA 1997). Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income. You became a resident of Australia for tax purposes in the relevant income year. A lump sum payment from the Fund was received in the 2015-16 income year. As this was more than six months after you became an Australian resident, section 305-70 of the ITAA 1997 applies to the lump sum payment so that an amount of applicable fund earnings (if any) is included in your assessable income for the 2015-16 income year. | Detailed Reasoning - Applicable fund earnings: The 'applicable fund earnings' is the amount worked out under either subsections 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. In your case, the amount included as assessable income is calculated under subsection 305-75(2) of the ITAA 1997 because you became an Australian resident before the start of the period to which the lump sum relates. Subsection 305-75(2) of the ITAA 1997 states: If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day ); (ii) the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other *foreign superannuation fund during the period; (a) 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 income tax); (b) add the total of all your previously exempt fund earnings (if any) | Detailed Reasoning - Foreign currency conversion: Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars (A$). The applicable fund earnings amount 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, the Commissioner considers what is the correct rule for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' under section 305-75 of the ITAA 1997 and states that each amount in a foreign currency that is an element in the calculation is to be translated to Australian dollars at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount in the Foreign Fund that is attributable to contributions and transfers made on or after the day when you became a member of the Foreign Fund from the amount vested in you when the lump sum was paid. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum. | Detailed Reasoning - Calculation of the assessable amount of lump sum payment from the Foreign Fund: In accordance with subsection 305-75(2) of the ITAA 1997, the amounts determined at subparagraphs 305-75(2)(a)(i) and (ii) are added. This total is then subtracted from the amount that was vested in you when the lump sum was paid. To this figure we add the amount determined under paragraph 305-75(2)(c) of the ITAA 997. The amount worked out above represents your assessable 'applicable fund earnings' in respect of the lump sum received from the Foreign Fund. This amount should be included in your income tax return for the 2015-16 income year. | Detailed Reasoning - Election: A taxpayer transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the payment's applicable fund earnings treated as assessable income of the Australian superannuation fund. As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate. To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997.