Private ruling: Lump sum transfer from a foreign superannuation fund
Date of advice: 13 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is any part of the lump sum payment from a foreign pension scheme 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 held two accounts (Foreign Pension 1 and Foreign Pension 2) with a pension scheme established and controlled in an overseas country (the Foreign Fund). The Taxpayer immigrated to Australia from the overseas country as a temporary resident for employment purposes in 199X. The Taxpayer then returned to the overseas country for a period of several years. The Taxpayer was not an Australian residence for tax purpose during this period. The Taxpayer requested a transfer of their funds from their two foreign pensions to a pension scheme established and controlled in Australia (the Australian Fund). The Taxpayer could not access their benefits in either of the foreign pensions other than at retirement in the overseas country. A transfer payment from Foreign Pension 1 and a transfer payment from Foreign Pension 2, were received in the Australian Fund in 2018. The Taxpayer then closed their accounts in the Foreign fund. There were no contributions or amalgamations to Foreign Pension 1 since the Taxpayer became an Australian resident. There was one contribution to Foreign Pension 2 in 199Y. The Taxpayer does not have any further interest in the Foreign fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 295-95 | 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 subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Lump sum payments transferred from a foreign superannuation fund: 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 Income Tax Assessment Act 1997 (ITAA 1997). The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (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. Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund then section 305-70 of the ITAA 1997 will not apply to the payment received. In this case, the lump sum benefit was paid from a pension scheme established and controlled in an overseas country. It is evident that the Foreign Fund is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. The Taxpayer could not access their benefits in either of the foreign pensions other than at retirement in the overseas country. Based on the information provided, it is considered that the Foreign Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Assessable Amount: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a person’s assessable income where the payment is received more than six months after becoming an Australian resident under section 305-70 of the ITAA 1997. The Taxpayer became a resident of Australia for tax purposes in 1997 and the lump sum benefit was transferred to Australia more than six months after The Taxpayer became an Australian resident. Consequently, the exemption under section 305-60 of the ITAA 1997 will not apply. Therefore, a portion of the lump sum payment will be assessable under subsection 305-75(3) of the ITAA 1997. This calculation effectively means that The Taxpayer will be assessed only on the income earned in the foreign fund while The Taxpayer was a resident of Australia. That is, The Taxpayer will only be assessed on the accretion in the foreign fund less any contributions made since The Taxpayer became a resident of Australia. Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid. Subsection 305-75(3) of the ITAA 1997 states: If The Taxpayer become an Australian resident after the start of the period to which the lump sum relates (but before The Taxpayer received it) 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 The Taxpayer just before the day (the start day ) The Taxpayer 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 The Taxpayer 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 remainder of the period; (b) subtract that total amount from the amount in the fund that was vested in The Taxpayer 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 The Taxpayer were an Australian resident; (d) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). | 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 (AUD). In ATO Interpretative Decision ATO ID 2015/7 Income tax/ Superannuation Foreign currency translation rules in working out ‘applicable fund earnings ’ under section 305-75 of the ITAA 1997 , 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. Together with the application of subsection 960-50(4) of the ITAA 1997 this has the result that the payment the Taxpayer received is translated into AUD at the exchange rate applicable at the time of receipt or payment. Similarly, the amount vested in the fund on the day before The Taxpayer became an Australian resident is converted to AUD at the exchange rate that applied on that day. | Detailed Reasoning - Calculation of Assessable Amount: Based on the information provided, the date the Taxpayer became a resident of Australia (date of residency) was in 199X. The taxpayer has provided the amount of the lump sum in Foreign Pension 1 and Foreign Pension 2 just before the residency date. The taxpayer has provided the amount of the lump sum in Foreign Pension 1 and Foreign Pension 2 that was vested in the Taxpayer on the date of receipt of the lump sum. One contribution was made to Foreign Pension 2 after the residency date. No transfers were made to either account from other foreign superannuation funds. Under paragraph 305-75(3)(c) of the ITAA 1997, the result above is multiplied by the proportion of days the Taxpayer was a resident to the total number of days from when the Taxpayer was a resident until the date the payment was made. Paragraph 305-75(3)(d) of the ITAA 1997 concerns previously exempt fund earnings calculated under subsections 305-75(5) and (6) of the ITAA 1997. Previously exempt fund earnings are the applicable fund earnings of any amounts transferred from one foreign superannuation fund to another foreign superannuation fund after The Taxpayer became a resident of Australia. In this case, there are no previously exempt fund earnings. Therefore, the ‘applicable fund earnings’ in respect of the lump sum payment received by the Taxpayer from the Foreign Fund that should be included in the Taxpayer’s assessable income for the 2017-18 income year.