Private ruling: Foreign superannuation fund
Date of advice: 4 September 2018
Published: November 2018
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of the lump sum payment received from foreign 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: You hold interests in the Foreign Pension (the Pension) in an overseas country prior to becoming a resident of Australia for taxation purposes. The Pension is a retirement fund established and managed outside Australia. You provided evidence to indicate that each of the Schemes meet the definition of a foreign superannuation fund. Benefits in the Scheme are only payable in the overseas country upon reaching retirement age, or upon death. Early withdrawals for non-retirement purposes are not permitted. You became a resident of Australia for taxation purposes on the 20XX – XX financial year. There were no contributions or pension amalgamations to the Schemes while you were a resident of Australia. You provided the values of the amounts in the Schemes as at the day before the Residency Date. You provided the estimated values of the amounts in the Schemes as at a particular transfer date. You made have made no additional contributions into the Scheme since your residency date. There have been no transfers into the Scheme from other foreign pension schemes since becoming a resident of Australia. You intend to transfer your benefits in the Country A pension scheme to a complying superannuation fund in Australia. Once the transfer has taken place you will no longer have any interests in the overseas pension scheme.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 305-55 | Income Tax Assessment Act 1997 section 305-60 | 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 960-50(1) | Income Tax Assessment Act 1997 subsection 960-50(4)

Reasons for decision: Summary: A portion of the lump sum payments that the Taxpayer will receive from the Schemes should be included as assessable ‘applicable fund earnings’ in the Taxpayer’s income tax return for the 20XX-XX income year. The amounts that should be included depend on the value of the Taxpayer’s interests in the Schemes on the date of the transfer and the foreign exchange rate on that date. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: ‘ Foreign superannuation fund ’ is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). In this case, the Taxpayer provided evidence to indicate that the Schemes are foreign superannuation funds 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 Scheme during the period in which they were a resident of Australia. 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 – Example calculation: The Taxpayer has yet to receive their two lump sums from the Schemes. Until the time the payments take place, we are unable to advise the actual figure to be included as assessable ‘applicable fund earnings’ in the Taxpayer’s tax return. However, we will demonstrate how the applicable fund earnings are calculated by using an example had the transfer of the Taxpayer’s benefits occurred on a particular transfer date. Please note that when the payments are actually made the applicable fund earnings amount will need to be recalculated using the correct transfer values. The example calculation of the applicable fund earnings for lump sums received from the Schemes using a transfer date is shown in the table below. Any amounts in foreign currency are translated into Australian dollars using the exchange rate applicable on the day of receipt . | Detailed Reasoning - A: Estimated value of the Taxpayer’s interest in the Scheme on the day before the Residency Date [amount] | Detailed Reasoning - B: Part of the lump sum attributable to contributions to Scheme A 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) | Detailed Reasoning - E: Amount in the Scheme vested in the Taxpayer when the lump sum was paid [amount] | 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 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 - Total applicable fund earnings: Therefore, a part of the lump sum payments to be made from the Schemes should be included as assessable ‘applicable fund earnings’ in the Taxpayer’s income tax return for the 20XX-XX income year if the payments are made in the third quarter of 20XX. When the transfers do occur, the amounts in Item E in the table above will most likely be different. This will affect the amounts in Items F and I. | 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 If the Taxpayer no longer has an interest in the Foreign Pension Scheme, 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.