Private ruling: Lump sum transfer from a foreign superannuation fund
Date of advice: 4 February 2019
Published: May 2019
Ruling period: Income year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is any part of a transfer from one overseas pension scheme to another overseas pension scheme 'previously exempt fund earnings' as defined by subsection 305-75(5) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Taxpayer arrived in Australia from the foreign country and has been an Australian resident for tax purposes since the Residency Date. The Taxpayer held an interest in a defined benefits pension scheme established and controlled in the foreign country. The Taxpayer has not been able to obtain the value of their benefits in the Foreign Defined Benefits Plan on the day before the Residency Date. In 2016-17, the Taxpayer converted the total amount of their benefits in the Foreign Defined Benefits Plan to a lump sum at a cash equivalent transfer value. The amount was transferred to a pension scheme established and controlled in the foreign country (the Foreign SIPP). The Taxpayer intends to transfer the benefits in the Foreign SIPP to Australia. The Taxpayer has made no contributions or amalgamations to the Foreign Defined Benefits Plan since becoming a resident of Australia. The Foreign Defined Benefits Plan and the Foreign SIPP are considered to be foreign superannuation funds for the purposes of Subdivision 305-B of the ITAA 1997. The Taxpayer has used a particular methodology to estimate the amount in the Foreign Defined Benefits Plan that was vested in them on the day before the Residency Date. The Australian Taxation Office has agreed that this is an appropriate estimation methodology.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 subsection 305-70(4) | Income Tax Assessment Act 1997 section 305-75 | 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 paragraph 305-75(3)(d) | Income Tax Assessment Act 1997 subsection 305-75(5) | Income Tax Assessment Act 1997 subsection 305-75(6) | Income Tax Assessment Act 1997 subsection 960-50(6) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The portion of the lump sum payment transferred by the Taxpayer from the Foreign Defined Benefits Plan to the Foreign SIPP that is ‘previously exempt fund earnings’ is the Australian dollar equivalent of X. This amount of previously exempt fund earnings must be included in the calculation of the Taxpayer’s ‘applicable fund earnings’ under section 305 - 75 of the Income Tax Assessment Act 1997 (ITAA 1997) when the funds in the Foreign SIPP are transferred to Australia at a later date. For the purposes of the calculation, the amount of ‘previously exempt fund earnings’ must be converted into Australia dollars using the exchange rate on the date of the eventual transfer to Australia. | 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 Foreign Defined Benefits Plan and the Foreign SIPP 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). | Detailed Reasoning - Previously exempt fund earnings: However, the growth in a foreign superannuation fund is not immediately included in a taxpayer’s assessable income if the lump sum transfer was from one foreign superannuation fund to another foreign superannuation fund. Transfers between foreign superannuation funds are excluded by subsection 305 - 70(4) of the ITAA 1997, which states that: (4) Any part of the lump that is paid into another foreign superannuation fund is not assessable income and is not exempt income. Instead, the amount of growth in the fund is set aside as future ‘previously exempt fund earnings,’ for when a lump sum is paid from a foreign superannuation fund to Australia in the future. Subsection 305-75(5) defines previously exempt fund earnings as follows: You have an amount of previously exempt fund earnings in respect of the lump sum if: (a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and (b) the amount is attributable to a payment received from a foreign superannuation fund; and (c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund. Subsection 305-75(6) states: The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section). | Detailed Reasoning - Calculation of the applicable fund earnings amount: As the transfer from the Foreign Defined Benefits Plan to the Foreign SIPP is a transfer between two foreign superannuation funds, the growth in the Foreign Defined Benefits Plan will be set aside as future ‘previously exempt fund earnings’. As the Taxpayer became a member of the Foreign Defined Benefits Plan before they became a resident of Australia, the growth in the Foreign Defined Benefits Plan will be worked out in accordance with subsection 305-75(3) of the ITAA 1997, outlined above. The calculation of the total growth in the Foreign Defined Benefits Plan in accordance with subsection 305-75(3) of the ITAA 1997 is shown in the table below. | Detailed Reasoning - A: Agreed estimated value of the Taxpayer’s interest in the Foreign Defined Benefits Plan on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Foreign Defined Benefits Plan | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into the Foreign Defined Benefits Plan | 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 Defined Benefits Plan vested in the Taxpayer when the lump sum was paid to the Foreign SIPP | 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 (as future Previously Exempt Fund Earnings ) (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - X: Therefore, the future ‘previously exempt fund earnings’ of the payment transferred from the Foreign Defined Benefits Plan to the Foreign SIPP is calculated as X. This amount of previously exempt fund earnings must be included in the calculation of the Taxpayer’s ‘applicable fund earnings’ under section 305-75 of the ITAA 1997 when the funds in the Foreign SIPP are transferred to Australia at a later date. | Detailed Reasoning - Foreign currency conversion: 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. In other words, the amount of ‘previously exempt fund earnings’ in this case, being X, must be converted into Australia dollars using the exchange rate on the date on which the Taxpayer’s superannuation monies are eventually transferred to Australia.