Private ruling: Is lump sum benefit paid from a foreign super fund assessable as applicable fund earnings
Date of advice: 16 May 2017
Published: September 2017

Ruling: Q1: Is any part of the lump sum benefit paid from a foreign super 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: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Taxpayer arrived in Australia and has been an Australian resident for tax purposes since the Residency date. Before arriving in Australia the Taxpayer was employed overseas and became a member of a foreign Pension Scheme, a defined benefit scheme established and controlled by Country B. The Taxpayer provided evidence to indicate that the foreign Pension Scheme was a foreign superannuation fund. Under the terms of the foreign Pension Scheme, benefits cannot be accessed other than at death, invalidity or retirement. An amount in the foreign Pension Scheme was vested in the Client on the day before the Residency date. There have been no transfers or pension amalgamations made from other foreign super funds to the foreign Pension Scheme since your client departed from Country B and became a resident of Australia. In the 2016-17 income year, the Taxpayer received an amount from the foreign Pension Scheme into an Australian bank account. A month later, the Taxpayer received another lump sum from the foreign Pension Scheme into an Australian bank account. Immediately after the second transfer into the Australian bank account, the Taxpayer had no remaining interest in the foreign Pension Scheme. The exchange rate published on the ATO website that applied is the date of receiving the remaining balance from the foreign Pension Scheme. The Taxpayer is above their preservation age.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 295-95(2) | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75 | Income Tax Assessment Act 1997 section 960-50 | Income Tax Assessment Act 1997 subsection 960-50(4) | Income Tax Assessment Act 1997 subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 section 10 | Superannuation Industry (Supervision) Act 1993 section 19 | Superannuation Industry (Supervision) Act 1993 section 62 Summary | The 'applicable fund earnings' in respect of the lump sum payment from the foreign Pension Scheme is $XXXX. This amount must be included in the Taxpayers income tax return for the 2015-16 income year. | Detailed reasoning | Lump sum payments transferred from foreign superannuation funds | Section 305-70 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum (if any) in their assessable income. | In accordance with subsection 305-70(2) of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 of the ITAA 1997 is included in the assessable income of a person. | The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income. | The applicable fund earnings amount is worked out under either subsection 305-75(2) or (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 was not an Australian resident at all times during the period to which the lump sum relates. | Applicable fund earnings | The Taxpayer became a resident of Australia for tax purposes on the Residency Date and the lump sum payments from the foreign Pension Scheme were transferred in two transfers. As this was more than six months after the Taxpayer became an Australian resident, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in your client's assessable income for the relevant year. | The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(3) applies where the person becomes 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, 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 your client is assessed only on the income earned on their benefits in the foreign Pension Scheme less any contributions made since the Taxpayer became a resident of Australia. Any earnings made during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid. | Furthermore, in regards to the calculating the applicable funds earning for the second transfer subsection 305-75(4) states that: | If the lump sum is not the first lump sum from the fund you have received to which this section applies, for subsections (2) and (3) the start day is the day after you received the most recent such lump sum. | 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 is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 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 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. | For the transfers made from the foreign Pension Scheme in the first and second transfer, the exchange rate applicable to these transfers is the rate at which the final lump sum was made into Australia. | Therefore, for the purposes of section 305-70, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount in the Scheme vested in your client just before the day he became an Australian resident, from the amount received from the Scheme. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum. | Calculation of the applicable fund earnings amount - First transfer from the foreign Pension Scheme into Australian bank account | The calculation of the applicable fund earnings amount in respect of the amounts transferred from foreign Pension Scheme to the taxpayer's Australian bank account on the date when first transfer was made is shown in the tables below. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt. | Item | Description | Amount in (£) | Amount in (A$) | A | Amount in the foreign Pension Scheme vested in the taxpayer on the day just before the Residency Date | £XXXX | $XXXX | B | Part of the payment attributable to contributions to foreign Pension Scheme during the remainder of the period | 0.00 | $0.00 | C | Part of the payment attributable to amounts transferred into foreign Pension Scheme from any other foreign funds superannuation funds during the remainder of the period | 0.00 | $0.00 | D | A + B + C | (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | $XXXX | E | Amount in the foreign Pension Scheme vested in the Taxpayer when the lump sum was transferred into the Australian bank account | £XXXX | $XXXX | F | E - D | (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) | $XXXX | G | The proportion of the total days during the period day before the Residency Date and the date of receipt which the Client was an Australian resident for tax purposes. | 1 | H | Previously exempt fund earnings (if any) | 0.00 | 0.00 | 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) | $XXXX | Calculation of the applicable fund earnings amount - Second transfer from foreign Pension Scheme into Australian bank account | The calculation of the applicable fund earnings amount in respect of the second amount transferred from foreign Pension Scheme to the taxpayer's Australian bank account in respect to the second transfer is shown in the tables below. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = £0.XXXX. | Item | Description | Amount in (£) | Amount in (A$) | A | Amount in the foreign Pension Scheme vested in the taxpayer on the day just after you received the most recent such lump sum. | £XXXX | $XXXX | B | Part of the payment attributable to contributions to foreign ension Scheme during the remainder of the period | 0.00 | $0.00 | C | Part of the payment attributable to amounts transferred into foreign Pension Scheme from any other foreign funds superannuation funds during the remainder of the period | 0.00 | $0.00 | D | A + B + C | (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | $XXXX | E | Amount in the foreign Pension Scheme vested in the Taxpayer when the lump sum was transferred into the Australian bank account | £XXXX | $XXXX | F | E - D | (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) | $XXXX | G | The proportion of the total days during the period from day of receiving the most recent amount to the date of Receipt in which the Client was an Australian resident for tax purposes. | 1 | H | Previously exempt fund earnings (if any) | 0.00 | 0.00 | 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) | $XXXX | 1. Therefore the 'applicable fund earnings' amount in respect of the lump sum payment transferred from the foreign Pension Scheme that should be included in the Taxpayer's assessable income for the 2015-16 income year is $XXXXX