Private ruling: Lump sum from a foreign superannuation fund
Date of advice: 19 September 2016
Published: November 2016
Ruling period: 20XX-XX income year
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of the benefits transferred from your client's pension scheme in an overseas country 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: Your client was initially granted temporary residency and first arrived in Australia several years ago. Your client was then granted Permanent Residency several years ago. Your client then travelled back to the overseas country several years ago. Your client migrated permanently to Australia as an Australian citizen several years ago. Your client held an interest in a pension scheme (Pension Scheme) in an overseas country. The value of your client's interest in the Pension Scheme on the day before residency date is an amount. During the relevant income year, your client received a lump sum payment from the Pension Scheme. The payment from the Pension Scheme was transferred to a complying Australian superannuation fund. The daily exchange rate on the day your client received a lump sum payment from the Pension Scheme is published on the ATO website. The transferred lump sum represented all of your client's interest in the Pension Scheme. There have been no contributions or pension amalgamations to the Pension Scheme since your client migrated to Australia. Funds cannot be accessed from the Pension Scheme other than at retirement in the overseas country.

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)

Reasons for decision: 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, your client provided evidence to indicate that the Pension Scheme is a foreign superannuation fund as defined by the act. Therefore, section 305-70 of the ITAA 1997 applies in this case as the superannuation lump sum was received more than six months after the Residency Date from a foreign superannuation fund. In accordance with section 305-70 of the ITAA 1997, your client is required to include in their assessable income so much of the lump sum as equals their applicable fund earnings. | Detailed Reasoning - Applicable fund earnings: Typically, 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, which 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 they earned on their benefits in the Pension Scheme during the relevant period. Earnings made during periods of non-residency, contributions, and transfers 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. 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 - Calculation of the applicable fund earnings amount: The calculation of the applicable fund earnings for the lump sum received from the Pension Scheme is shown in the table below with reference to the facts of the case. As discussed above, any amounts in a foreign currency are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Value of the taxpayer's interest in the Pension Scheme on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Pension Scheme | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into the Pension Scheme | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Pension Scheme vested in the taxpayer when the lump sum was paid | 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) × Z%: The result of the calculation above is the 'applicable fund earnings' amount in respect of the lump sum payment transferred from the Pension Scheme that should be included in your client's assessable income for the relevant income year. However, as your client no longer has an interest in the Pension Scheme and their interest in that fund was made as a lump sum directly to a complying Australian superannuation fund, they are eligible, provided the other requirements in section 305-80 of the ITAA 1997 are met, to make an election to have all or part of the applicable fund earnings treated as assessable income of their Australian superannuation fund. If the election is made, the amount of the applicable fund earnings specified in the election notice is 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.