Private ruling: Lump sum payment from a foreign superannuation fund
Date of advice: 23 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are any parts of the transfers from the overseas pension schemes to an Australian superannuation 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: The Taxpayer arrived in Australia the Residency Date The Taxpayer retained a preserved pension benefit in the Country A Pension Scheme 1 which is a pension scheme established and controlled in the Country A. The Taxpayer’s interest in the Country A Pension Scheme 1 was transferred to the Australian Fund. The Australian Fund is a fully compliant Qualifying Recognised Overseas Pension Scheme (QROPS) registered scheme. The Taxpayer also retained a preserved pension benefit in the Country A Pension Scheme No 2 which is a pension scheme established and controlled in the Country A. The Taxpayer’s interest in the Country A Pension Scheme 2, was transferred to the Australian Fund. The Taxpayer also retained an account with the Country A Pension Scheme No 3, an accumulation pension scheme established and controlled in the Country A. The Taxpayer’s interest in the Country A Pension Scheme 3, was transferred to the Australian Fund. The Taxpayer requested the ATO provide a historical value of their benefits as the three Country A Pension Scheme administrators have been unable to provide the cash equivalent transfer values of There were no contributions to any of the Country A Pension Schemes while the Taxpayer was a resident of Australia. There were no periods of non-residency since the Residency Date for the Taxpayer.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 subsection 305-75(3) | Income Tax Assessment Act 1997 paragraph 305-75(3)(a) | Income Tax Assessment Act 1997 paragraph 305-75(3)(b) | Income Tax Assessment Act 1997 paragraph 305-75(3)(c) | Income Tax Assessment Act 1997 section 305-80 | Income Tax Assessment Act 1997 subsection 960-50(1) | Income Tax Assessment Act 1997 subsection 960-50(4) | Income Tax Assessment Act 1997 subsection 960-50(6) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: A portion of the lump sum payments transferred by the Taxpayer from the overseas pension schemes to the Australian Fund should be included as assessable ‘applicable fund earnings’ in the Taxpayer’s income tax return for the 2016-17 income year. If the Taxpayer no longer has an interest in the overseas pension schemes, they may be eligible to make an election to have these applicable fund earnings treated as the assessable income of their Australian superannuation fund. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: ‘ Foreign superannuation fund ’ is defined in subsection 995 - 1(1) of the ITAA 1997. In this case, the Taxpayer provided evidence to indicate that the Country A Pension Scheme is a foreign superannuation fund as defined by the act. When a taxpayer transfers an amount from a foreign superannuation fund to Australia, the growth they earned on their foreign superannuation during the period when they were a resident of Australia must be included in their assessable income as ‘applicable fund earnings’ under section 305 - 70 of the ITAA 1997. If the taxpayer became a member of the foreign superannuation fund before they became a resident of Australia, the amount of growth, or ‘applicable fund earnings’ is calculated under subsection 305 - 75(3) of the ITAA 1997. The effect of subsection 305-75(3) of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the Country A Pension Scheme. Any amounts attributable to contributions made by the Taxpayer and amounts attributable to transfers from other foreign funds do not form part of the taxable amount when the overseas benefit is paid. | 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. 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, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner, in considering Item 11A of the table in subsection 960-50(6) of the ITAA 1997, determined that the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsection 305-75(3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. | Detailed Reasoning - Transfer from the Country A Pension Scheme No 1 to the Australian Fund - Applicable fund earnings amount – Calculation: The calculation of the applicable fund earnings for the lump sum received from the Country A Pension Scheme 1 is shown in the table below with reference to the facts of the case. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Agreed estimated value of the Taxpayer’s interest in the Country A Pension Scheme on January 1998 (the day before the Residency Date) | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Country A Pension Scheme | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Country A Pension Scheme vested in the Taxpayer when the lump sum was paid on January 2017 | Detailed Reasoning - E - D: (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) | Detailed Reasoning - G: The proportion of the total days during the period (from the Residency Date to the date of receipt) of which the taxpayer was an Australian resident | Detailed Reasoning - H: Previously exempt fund earnings (if any) | Detailed Reasoning - I: F x G + H = Applicable Fund Earnings (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - Y-X: The result of the calculation above is the amount of ‘applicable fund earnings’ in respect of the lump sum payment transferred from the overseas pension scheme no 1 that should be included in the taxpayer’s assessable income for the 2016-17 year. | Detailed Reasoning - Transfer from the Country A Pension Scheme No 2 to the Australian Fund - Applicable fund earnings amount – Calculation: The calculation of the applicable fund earnings for the lump sum received from the Country A Pension Scheme No 2 is shown in the table below with reference to the facts of the case. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Agreed estimated value of the Taxpayer’s interest in the Country A Pension Scheme on January 1998 (the day before the Residency Date) | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Country A Pension Scheme | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Country A Pension Scheme vested in the Taxpayer when the lump sum was paid on January 2017 | Detailed Reasoning - E - D: (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) | Detailed Reasoning - G: The proportion of the total days during the period (from the Residency Date to the date of receipt) of which the taxpayer was an Australian resident | Detailed Reasoning - H: Previously exempt fund earnings (if any) | Detailed Reasoning - I: F x G + H = Applicable Fund Earnings (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - Y-X: The result of the calculation above is the amount of ‘applicable fund earnings’ in respect of the lump sum payment transferred from the overseas pension scheme no 2 that should be included in the taxpayer’s assessable income for the 2016-17 year. | Detailed Reasoning - Transfer from the Country A Pension Scheme 3 to the Australian Fund - Applicable fund earnings amount – Calculation: The calculation of the applicable fund earnings for the lump sum received from the Country A Pension Scheme 3 is shown in the table below with reference to the facts of the case. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Agreed estimated value of the Taxpayer’s interest in the Country A Pension Scheme on January 1998 (the day before the Residency Date) | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Country A Pension Scheme | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Country A Pension Scheme vested in the Taxpayer when the lump sum was paid on January 2017 | Detailed Reasoning - E - D: (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) | Detailed Reasoning - G: The proportion of the total days during the period (from the Residency Date to the date of receipt) of which the taxpayer was an Australian resident | Detailed Reasoning - H: Previously exempt fund earnings (if any) | Detailed Reasoning - I: F x G + H = Applicable Fund Earnings (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - Y-X: The result of the calculation above is the amount of ‘applicable fund earnings’ in respect of the lump sum payment transferred from the overseas pension scheme no 3 that should be included in the taxpayer’s assessable income for the 2016-17 year. | Detailed Reasoning - Election: According to section 305-80 of the ITAA 1997, a taxpayer who is transferring their overseas superannuation benefits directly to an Australian complying superannuation fund is able to elect to have the Australian superannuation fund pay the tax on the applicable fund earnings if the taxpayer no longer has an interest in the overseas fund immediately after the payment. If the Taxpayer no longer has an interest in the Country A Pension Scheme, they may be eligible to make the election in relation to the lump sum transfer. If an election is made, the elected amount will be assessable to the superannuation fund and subject to tax at 15% rather than being assessable to the Taxpayer and subject to tax at the Taxpayer's marginal tax rate.

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