Private ruling: Lump sum transfer from foreign superannuation fund
Date of advice: 15 August 2018
Published: October 2018
Ruling period: Income year ended 30 June 20xx.
Date scheme commenced: 1 July 20xx.

Ruling: Q1: Is any part of the benefit transferred 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 migrated to Australia and became a resident for tax purposes in 20xx. The Taxpayer held an interest in the Foreign Fund which is a defined benefit fund established and controlled in an overseas country. In 20xx, on the Transfer Date, the Taxpayer transferred their entire benefit in the Foreign Fund to their Australian bank account. According to the Scheme Documents available on the Foreign Fund’s website, the Taxpayer could not access their benefits in the Foreign Fund other than at retirement in the Country A. The Taxpayer has confirmed this. There have been no contributions or amalgamations to the Foreign Fund since the Taxpayer migrated to Australia. The Taxpayer was an Australian resident for the entire period from the Residency Date to the Transfer Date. The exchange rate on the Transfer Date was published on the Australian Taxation Office’s (ATO) website.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Subsection 305-70(1) | Income Tax Assessment Act 1997 Section 305-75 | Income Tax Assessment Act 1997 Subsection 305-75(2) | Income Tax Assessment Act 1997 Subsection 305-75(3) | Income Tax Assessment Act 1997 Subsection 305-75(5) | Income Tax Assessment Act 1997 Subsection 305-75(6) | Income Tax Assessment Act 1997 Subsection 305-80(1) | Income Tax Assessment Act 1997 Subsection 305-80(2) | 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 from the Foreign Fund must be included as assessable ‘applicable fund earnings’ in the Taxpayer’s tax return for the 20xx-xx income year. As the Taxpayer no longer has an interest in the Foreign Fund, they will be eligible to make an election to have any applicable fund earnings treated as the assessable income of his Australian superannuation fund. | 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 evidence indicates that the Foreign Fund is a foreign superannuation fund as defined by the Act. Therefore, section 305-70 of the ITAA 1997 applies in this case as the superannuation lump sum was 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 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 an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings are 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 the Foreign Fund 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 the lump sum received from the Foreign Fund 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 the applicable fund earnings amount: The calculation of the applicable fund earnings for the lump sum received from the Foreign Fund is shown in the table below with reference to the facts of the case. As discussed above, any amounts in XXX 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 Foreign Fund on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Foreign Fund | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into the Foreign Fund | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Foreign Fund 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 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) Therefore, the ‘applicable fund earnings’ amount in respect of the lump sum payment transferred from the Foreign Fund should be included in the Taxpayer’s assessable income for the 20xx-xx 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 the Foreign Fund, 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.