Private ruling: Foreign superannuation fund
Date of advice: 29 June 2018
Published: September 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is any part of the lump sum payment from the foreign superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: If any part of the lump sum payment is included in your assessable income as applicable fund earnings, are you entitled to a foreign income tax offset for income tax paid in the foreign country in respect of the lump sum payment in accordance with section 770-10 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You became a tax resident of Australia on a particular date in the 2005-06 income year (the Residency Date). While living in a foreign country, you held a retirement annuity policy with the Fund. The object of the Fund is to provide benefits for retirement and, in case of a member’s death before retirement, death benefits to their dependants. Under the rules of the Fund it provides benefits to be made to a member: _ after attaining age 55, _ on attaining their normal retirement date at age 60, _ as a result of the member’s total and permanent disablement or _ upon death. The rules of the Fund were amended such that if a person formally emigrated from the foreign country, the full value of the benefits could be remitted overseas. The amount in the Fund vested in you on the day before the Residency date was provided in the foreign currency. Since you became an Australian resident, you have not made contributions or transfers into the Fund. In the 2017-18 income year, a lump sum payment was made to you from the Fund to a bank account in the foreign country. An amount was withheld for tax purposes in the foreign country. After the payment, you have no remaining interest in the Fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 295-95(2). | Income Tax Assessment Act 1997 section 305-70. | Income Tax Assessment Act 1997 section 305-75. | Income Tax Assessment Act 1997 section 770-5. | Income Tax Assessment Act 1997 section 770-10. | Income Tax Assessment Act 1997 section 770-70. | Income Tax Assessment Act 1997 section 960-50. | Income Tax Assessment Act 1997 subsection 960-50(4). | Income Tax Assessment Act 1997 subsection 995-1(1). | Superannuation Industry (Supervision) Act 1993 section 10. | Superannuation Industry (Supervision) Act 1993 section 19. | Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision: Summary: The ‘applicable fund earnings’ in respect of the lump sum payment from the Fund must be included in your income tax return for the 2017-18 income year. You are entitled to a foreign income tax offset in respect of part or all of the applicable fund earnings amount that is included in the assessable income for the 2017-18 income year. | 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, you provided evidence to indicate that the 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, you are required to include in your assessable income so much of the lump sum as equals your 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 you 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 remainder of 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 income 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 you are assessed only on the income they earned on their benefits in the Fund during the period between the start day and the date when the lump sum is paid. Any earnings made outside the period between the start day and the date when the lump sum is paid does not form part of the taxable amount when the overseas benefit is paid. Any amounts attributable to contributions made by you or transfers from other foreign funds also 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 payment from the Fund should be calculated by deducting the amount in the Fund on the day before the Residency Date from the amount in the Fund just before payment. 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 amount in respect of the amount paid from the Fund to you is shown in the table below. As discussed above, any amounts in foreign currency are translated into Australian dollars using the exchange rate applicable on the date of receipt. | Detailed Reasoning - A: Value of interest vested in you on the day just before the Residency Date X[amount] | Detailed Reasoning - B: Part of the payment attributable to contributions to the Fund 0.00 $0.00 | Detailed Reasoning - C: Part of the payment attributable to amounts transferred into the Fund from any other foreign funds 0.00 $0.00 | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Fund vested in you when the lump sum was paid in the 2017-18 income year X[amount] $[amount] | 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 1 July 2005 to date of payment of which you were an Australian resident for tax purposes. 1 | Detailed Reasoning - H: Previously exempt fund earnings (if any) 0.00 0.00 | 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 - $[amount]: Therefore the ‘applicable fund earnings’ amount in respect of the lump sum payment from the Fund that should be included in your assessable income for the 2017-18 income year is $[amount]. | Detailed Reasoning - Foreign income tax offset: From 1 July 2008 the foreign tax credit system was replaced by the foreign income tax offset system. A foreign income tax offset is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax. Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. When claiming a FITO, you are required to gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income. The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997). If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap. In your case, you are entitled to FITO for the income tax withheld from your income in the foreign country limited to the amount to which you are entitled under section 770-10 of the ITAA 1997. | Detailed Reasoning - Note: If you are claiming a foreign income tax offset of more than $1,000, you have to work out your foreign income tax offset limit. This may result in your tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to you. If you are claiming a foreign income tax offset of $1,000 or less, you only need to record the actual amount of foreign income tax paid that counts towards the offset (up to $1,000). More information on the calculation of the FITO cap and entitlements are available on the Tax office website www.ato.gov.a u at the link to “Guide to foreign income tax offset rules 2017”.