Private ruling: Lump sum payment from a foreign fund
Date of advice: 31 January 2018
Published: June 2018
Ruling period: 1 July 2016 to 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is any part of the lump sum payment received by you from a Foreign pension scheme assessable as applicable fund earnings in accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: An individual (the Taxpayer) held interests in a foreign pension scheme (the Scheme) prior to becoming a resident of Australia for taxation purposes. The Scheme is a retirement fund established and managed outside of Australia. Benefits in the Scheme are only payable upon reaching retirement age, death, or disability. Early withdrawals for non-retirement purposes are not permitted. The Taxpayer provided the date when they became a resident of Australia for taxation purposes. The Taxpayer provided the foreign currency value of their interest in the Scheme on the day before their residency date. There have been no contributions into the Scheme since the Taxpayer became a resident of Australia There have been no transfers into the Scheme from other foreign pension schemes since the Taxpayer became a resident of Australia. In the second quarter of 2017, the Taxpayer received a lump sum payment from the Scheme which represented their benefits in full. The Taxpayer no longer has an interest in the Scheme. The ATO website provides the exchange rate on the date of receipt.

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: A portion of the lump sum payment received from the Scheme is applicable fund earnings. This amount should be included in the Taxpayer’s assessable income in the 2016-17 income year. | Detailed Reasoning - Applicable fund earnings: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received more than six months after a person has become an Australian resident, will be assessable under section 305-70 of the ITAA 1997. The applicable fund earnings amount is subject to tax at the person’s marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income. The applicable fund earnings are worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person was not an Australian resident at all times during the period to which the lump sum relates. The overall effect of section 305-75 of the ITAA 1997 is that the Taxpayer will be assessed on the sum of: ● the total growth they earned on their benefits in a foreign superannuation fund during the period between the start day and the date when the lump sum is paid; and ● any previously exempt fund earnings. An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign 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 Taxpayer provided evidence to indicate that the Scheme is a foreign superannuation fund as defined by the act. 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 your benefits in the Scheme. Any amounts attributable to contributions made by or on behalf of 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 (A$). 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 Scheme is shown in the table below with reference to the facts of the case. As discussed above, any amounts in the 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 Scheme on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the 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 Scheme vested in the Taxpayer when the lump sum was paid on 11 March 2016 | 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 - Z – (X + Y): The Taxpayer’s applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 is as calculated above, and should be included as assessable income in their income tax return for the 2016-17 income year.