Private ruling: Lump sums received from certain foreign superannuation funds
Date of advice: 2 May 2016
Published: June 2016
Ruling period: Income year ending 30 June 2016
Date scheme commenced: 1 July 2016

Ruling: Q1: Is any part of the lump sum benefit received by a person (Your Client) from a foreign 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: Your Client migrated to Australia in the 20XX-YY income year. Your Client was a member of a foreign pension fund (the Foreign Fund). More than six months after becoming a resident of Australia for tax purposes, Your Client transferred their benefits from the Foreign Fund in full to an Australian complying self-managed superannuation fund (the Australian Fund). No contributions have been made to the Foreign Fund since Your Client became a resident of Australia. There have been no transfers into the Foreign Fund from any other foreign superannuation fund since Your Client became a resident of Australia. The Foreign Fund is a foreign superannuation fund.

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 305-75. | Income Tax Assessment Act 1997 section 305-80. | Income Tax Assessment Act 1997 section 960-50. Further issues for you to consider | Not applicable. | Anti-avoidance rules | Not applicable.

Reasons for decision: Summary: A portion of the lump sum received by Your Client from the Foreign Fund should be included in Your Client's assessable income for the 20XX-YY income year as the applicable fund earnings amount in respect of the lump sum. | 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. Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death. 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 (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. Your Client migrated to Australia on a date in the 20XX-YY income year and became a resident of Australia for tax purposes on that date. Your Client's benefits in the Foreign Fund were transferred to the Australian Fund more than six months after Your Client became an Australian resident. Therefore, section 305-70 of the ITAA 1997 applies to the payment so that an amount of applicable fund earnings (if any) is included in their assessable income for the 20XX-YY 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 Client's case, the amount included as assessable income is calculated under subsection 305-75(3) of the ITAA 1997 because they became an Australian resident after the start of the period to which the lump sum relates. 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 (but before you received 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 remainder of 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 income 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 subsection 305-75(3) of the ITAA 1997 is that Your Client is assessed only on the income earned while they were a resident of Australia. That is, Your Client is only assessed on the accretion in their benefits less any contributions made since they became a resident of Australia. Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the paying fund 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 (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 vested in Your Client just before the day they first became an Australian resident, from the amount received from the Foreign Fund. 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 the lump sum: The amount in the Foreign Fund vested in Your Client on the date just before they first became a resident of Australia is converted into Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum. The period for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In Your Client's case, Your Client was a resident for the whole period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1 . There are no previously exempt fund earnings in relation to the lump sum. | Detailed Reasoning - Calculation of the assessable amount of the payment from the Foreign Fund: In accordance with subsection 305-75(3) of the ITAA 1997, the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added. The above total is then subtracted from the amount determined under paragraph 305-75(3)(b) of the ITAA 1997. The resultant figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997. To the above figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997. The amount worked out represents Your Client's assessable 'applicable fund earnings' in respect of the lump sum received from the Foreign Fund. This amount should be included in their relevant income tax return. | 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.