Private ruling: Foreign superannuation lump sum
Date of advice: 20 March 2017
Published: May 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is any part of the transfer from an Overseas Pension Scheme 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) became an Australian resident for taxation purposes on the Residency Date. The Taxpayer was a member of the Overseas Pension Scheme, which is a defined benefits pension scheme. The Taxpayer provided evidence to indicate that the Overseas Pension Scheme was a foreign superannuation fund. There were no contributions or pension amalgamations to the Overseas Pension Scheme while the Taxpayer was a resident of Australia. The Overseas Pension Scheme made a transfer to a QROPS scheme capable of accepting overseas pension transfers. The Taxpayer has not been able to obtain the value of their benefits on the day before the Residency Date in the Overseas Pension Scheme. The Taxpayer has provided documentation from the Overseas Pension Scheme which indicates the value of the benefits at a date before the day before the Residency date. The ATO’s proposed estimation of the value of the Taxpayer’s benefits in the Overseas Pension Scheme was determined by using the known values to calculate a rate of growth, and then using this rate of growth to estimate the value of the fund on the day before the Residency Date. The Taxpayer agreed that this was an appropriate estimation methodology. The Taxpayer is under 65 years of age.

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 payment that the Taxpayer will transfer from the Overseas Pension Scheme to the QROPS scheme should be included as assessable ‘applicable fund earnings’ in the Taxpayer’s income tax return for the 2015-16. The amount that must be included depends on the value of the Taxpayer’s interest in the Overseas Pension Scheme on the date of the transfer. | 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 Overseas Pension Scheme is a foreign superannuation fund as defined by the ITAA 1997. 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 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 Overseas 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 - Applicable fund earnings amount – Calculation: The calculation of the applicable fund earnings for the lump sum received from the Overseas Pension Scheme on 15 July 2015 is shown in the table below. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, 15 July 2015, being A$1 = £0.4971. | Detailed Reasoning - A: Agreed estimated value of the Taxpayer’s interest in the Overseas Pension Scheme on the day before the Residency Date $X | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Overseas Pension Scheme Nil | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds Nil | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) $X | Detailed Reasoning - E: Amount in the Overseas Pension Scheme vested in the Taxpayer when the lump sum was paid on 15 July 2015 $Y | Detailed Reasoning - E - D: (The step outlined in paragraph 305-75(3)(b) of the ITAA 1997) $Y - $X | 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 1 | Detailed Reasoning - H: Previously exempt fund earnings (if any) Nil | 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 to be transferred from the Overseas Pension Scheme that should be included in the Taxpayer’s assessable income for relevant 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 transfer was the entirety of their benefits in the Overseas Pension Scheme, the Taxpayer will not have an interest in the Overseas Pension Scheme immediately after the payment. This means that they will 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. In addition, the elected amount will not be counted towards either the Taxpayer’s concessional or non-concessional contribution caps by virtue of subparagraph 291-25(2)(c)(i) of the ITAA 1997 and paragraph 292-90(2)(b) of the ITAA 1997.

ATO view documents: ATO ID 2015/7 Income tax/Superannuation: Foreign currency translation rules in working out ‘applicable fund earnings’ under section 305-75 of the ITAA 1997