Private ruling: Lump sum transfer from a foreign superannuation fund
Published: June 2015
Ruling period: Income year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is any part of the benefit received by the taxpayer from a Country A pension scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) in the 2014-15 income year? | A1: Yes.

Relevant facts and circumstances: The taxpayer arrived in Australia from an overseas country during the 2013-14 income year and has been an Australian resident for tax purposes since that date (the Residency Date). The taxpayer held an interest in an overseas pension scheme (Fund A) established and controlled in the overseas country. Soon after in the 2013-14 income year, the taxpayer transferred all of their interest in Fund A to another overseas pension scheme (Fund B) established and controlled in the overseas country. Fund A and Fund B are both foreign superannuation funds. Within 6 months of the Residency Date, an amount was transferred from Fund B into the taxpayer's superannuation account held in a complying superannuation fund in Australia (the Australian Fund). There was an amount remaining in Fund B after this transfer. The taxpayer did not transfer the entirety of their interest in Fund B during the 2013-14 income year due to the non-concessional contribution cap. In the 2014-15 income year, more than 6 months after the Residency Date, the taxpayer transferred an amount from Fund B to the Australian Fund. The taxpayer no longer has an interest in Fund B.

Relevant legislative provisions: 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 subsection 305-75(2) | Income Tax Assessment Act 1997 paragraph 305-75(2)(a) | Income Tax Assessment Act 1997 paragraph 305-75(2)(b) | Income Tax Assessment Act 1997 paragraph 305-75(2)(c) | 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 B to the Australian Fund that 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, both Fund A and Fund B are foreign superannuation funds as defined by the act. If a superannuation lump sum is received within six months of a taxpayer's residency date, the amount is generally tax free under section 305-60 of the ITAA 1997. By contrast, if a superannuation lump sum is received more than six months after a taxpayer's residency date, a portion of the lump sum will be assessable income under section 305-70 of the ITAA 1997. The law is rather clear on this distinction. The Commissioner does not have any discretion to treat a superannuation lump sum that is received more than six months after a taxpayer's residency date as being tax free. In this case, the first transfer from Fund B to the Australian Fund is tax free. However, the second transfer from Fund B to the Australian Fund was made more than six months after the Residency Date. As such, the taxpayer 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: The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As the taxpayer became a member of Fund B after they became an Australian resident, the taxpayer was an Australian resident at all times during the period to which the lump sum relates. This means that the applicable fund earnings are to be worked out in accordance with subsection 305-75(2) of the ITAA 1997 which states: If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day); (ii) the part of the lump sum (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 income tax); (c) add the total of all your 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 B. 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 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 equivalents of the amounts attributable to contributions and transfers from foreign funds. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of the second lump sum received from Fund B should be calculated by deducting the parts of the lump sum attributable to contributions and transfers from foreign superannuation funds from the total amount of the lump sum . All amounts in the calculation should be translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - Applicable fund earnings amount - Calculation: The calculation of the applicable fund earnings for the second 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 pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Part of the lump sum attributable to contributions to Fund B made in respect of the taxpayer | Detailed Reasoning - B: Part of the lump sum attributable to transfers into Fund B from foreign superannuation funds | Detailed Reasoning - A + B: (The step outlined in paragraph 305-75(2)(a) of the ITAA 1997) | Detailed Reasoning - D: Amount in Fund B vested in the taxpayer when the lump sum was paid in the 2014-15 income year | Detailed Reasoning - D - C: (The step outlined in paragraph 305-75(2)(b) of the ITAA 1997) | Detailed Reasoning - F: Previously exempt fund earnings (if any) | Detailed Reasoning - G: E + F = Applicable Fund Earnings (The step outlined in paragraph 305-75(2)(c) of the ITAA 1997) | Detailed Reasoning - Y - X: The result of this calculation above is the portion of the second lump sum payment transferred from Fund B to the taxpayer 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 Fund B, they are 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.