Private ruling: Lump sum from a foreign superannuation fund
Date of advice: 7 July 2016
Published: August 2016
Ruling period: Income year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is any part of the lump sum payment received by the taxpayer from a Pension Scheme assessable as applicable fund earnings in accordance with section 305-70 of the Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: The Taxpayer became a resident of Australia for tax purposes on the Residency Date. The Taxpayer became a member of a Pension Scheme that was established and controlled in an overseas country. The Taxpayer cannot access their benefits in the Pension Scheme other than at retirement. There have been no contributions or pension amalgamations to the Pension Scheme since the Taxpayer became an Australian resident for tax purposes. According to the operating rules of the Pension Scheme, a member may claim a lump sum withdrawal payment if they emigrate from the overseas country. The amount of the lump sum withdrawal is calculated by reference to a certain formula. More than six months after becoming an Australian resident, the Taxpayer transferred their benefits from the Pension Scheme to their bank account in Australia. After this transfer, the Taxpayer no longer has any interests in the Pension Scheme. If the Taxpayer had instead made their lump sum withdrawal on the day before the Residency Date, the method for calculating the Taxpayer's entitlements would have been the same and the Taxpayer would have received the same lump sum amount.

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 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: 1. The portion of the lump sum payment transferred by the Taxpayer from the Pension Scheme should be included as assessable 'applicable fund earnings' in the Taxpayer's income tax return for the income year of the transfer is nil . | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: 2. ' 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 Pension Scheme is a foreign superannuation fund as defined by the act. 3. 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). 4. 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 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: 5. 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. 6. 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: 7. 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 | 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: 8. The result of the calculation above is the amount of 'applicable fund earnings' in respect of the lump sum payment transferred from the Pension Scheme that should be included in the Taxpayer's assessable income for the income year of the transfer. 9. In this case, the value of Y and value of X are the same since the Taxpayer's entitlement would have been the same if the transfer had instead been made just before the Residency Date. In other words, the Taxpayer did not earn any income on their benefits in the Pension Scheme while they were a resident of Australia and the amount of their applicable fund earnings is nil.