Private ruling: Lump sum transfers from foreign superannuation funds
Date of advice: 6 July 2015
Published: July 2015
Ruling period: Income year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Is any part of the benefits received by the taxpayer from their overseas pension schemes assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: 1. Yes

Relevant facts and circumstances: The taxpayer arrived in Australia from an overseas country during the relevant income year and has been an Australian resident for tax purposes since that date (the Residency Date). The taxpayer held an interest in two pension schemes (Fund A and Fund B) that were established and controlled in the overseas country. The taxpayer provided evidence to indicate that both Fund A and Fund B are foreign superannuation funds. The taxpayer is unable to provide the total value of their interest in Fund A on the day before the Residency Date. The taxpayer has agreed that the Australian Taxation Office estimate of the value of their interest in Fund A on the day before the Residency Date is accurate. The taxpayer was able provide the total value of their interest in Fund B on the day before the Residency Date. There have been no contributions or pension amalgamations to either Fund A or Fund B since the taxpayer migrated to Australia. During the 2014-15 income year, an amount was transferred from Fund A into a complying superannuation fund in Australia (the Australian Fund). During the 2014-15 income year, an amount was transferred from Fund B into the Australian Fund. The taxpayer no longer has an interest in either Fund A or Fund B.

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

Reasons for decision: Summary: A portion of the lump sum payment transferred by the taxpayer from Fund A to the Australian Fund should be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2014-15 income year. A portion of the lump sum payment transferred by the taxpayer from Fund B to the Australian Fund should be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2014-15 income year. | 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 both Fund A and Fund B are foreign superannuation funds as defined by the act. Therefore, section 305-70 of the ITAA 1997 applies in this case as each of the superannuation lump sums were received more than six months after the Residency Date from a foreign superannuation fund. In accordance with section 305-70 of the ITAA 1997, the taxpayer is required to include in their assessable income so much of each lump sum as equals their applicable fund earnings. | Detailed Reasoning - Applicable fund earnings: The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As the taxpayer became an Australian resident after the start of the period to which each of the lump sums relate, the applicable fund earnings for each lump sum is worked out in accordance with 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 the taxpayer is assessed only on the income they earned on their benefits in Fund A and Fund B 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 determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of each of the lump sums should be calculated by deducting the Australian dollar equivalent of the amount vested in the taxpayer just before the Residency Date from the amount vested in the taxpayer on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt. | Detailed Reasoning - Calculation of applicable fund earnings - lump sum received from Fund A: The calculation of the applicable fund earnings for the lump sum received from Fund A 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: Agreed estimated value of the taxpayer's interest in Fund A on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to Fund A | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into Fund A | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in Fund A 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: The result of this calculation above is the portion of the lump sum payment transferred from Fund A to the Australian Fund which must be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2014-15 income year. | Detailed Reasoning - Calculation of applicable fund earnings - lump sum received from Fund B: The calculation of the applicable fund earnings for the lump sum received from Fund B 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 Fund B on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to Fund B | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into Fund B | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in Fund B 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 - Q - P: The result of this calculation above is the portion of the lump sum payment transferred from Fund B to the Australian Fund which must be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2014-15 income 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 As the taxpayer no longer has an interest in either Fund A or Fund B, they are eligible to make the election in relation to both lump sum transfers. 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.