Private ruling: Lump sum payments from a foreign superannuation fund
Date of advice: 15 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is tax payable when a lump sum from an overseas pension fund is transferred to a complying Australian superannuation fund? | A1: Yes

Relevant facts and circumstances: An individual (the Taxpayer) arrived in Australia from an overseas country on a certain date (the Residency Date). The value of the Taxpayer's benefits in an overseas pension scheme (Fund A) on the day before the Residency Date was provided. The value of the Taxpayer's benefits in another overseas pension scheme (Fund B) on the day before the Residency Date was provided. The Taxpayer transferred the entirety of Fund A to a third overseas pension scheme (the Overseas Pension Scheme). The Taxpayer also transferred the entirety of Fund B to the Overseas Pension Scheme. No contributions were made to either Fund B or the Overseas Pension Scheme after the Residency Date. However, an employer contribution was made to Fund A after the Residency Date. The Taxpayer then transferred the entirety of their benefits in the Overseas Pension Scheme to a complying Australian superannuation fund (the Australian fund). The Taxpayer cannot access their benefits in Fund A, Fund B or the Overseas Pension Scheme other than at retirement in the overseas country. The daily exchange rates are published on the Australian Taxation Office's website. The Taxpayer no longer has any interests in the Overseas Pension Scheme.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75 | 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 section 305-80 | 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 transferred from the Overseas Pension Scheme to the Australian Fund must be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the 2015-16 income year As the Taxpayer no longer has an interest in the Overseas Pension Scheme, they are eligible to make an election to have these applicable fund earnings treated as the assessable income of their 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 Taxpayer provided evidence to indicate that Fund A, Fund B and the Overseas Pension Scheme are all foreign superannuation funds as defined by the act. Typically, when a taxpayer transfers an amount from a foreign superannuation fund, 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 after they became a resident of Australia, the amount of growth, or 'applicable fund earnings' is calculated under subsection 305-75(2) of the ITAA 1997, which states: If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day ); (ii) the part of the lump sum (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 income tax); (c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6). 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 overall effect of these two subsections is that a 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 (which will either be the date just before the residency date or the date on which the taxpayer became a member of the fund) and the date when the lump sum is paid; and • Any previously exempt fund earnings | Detailed Reasoning - Previously exempt fund earnings: 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 earnings worked out by the applicable fund earnings calculation in relation to a transfer between two foreign superannuation funds will be set aside as future 'previously exempt fund earnings,' which will be included in the taxpayer's assessable income in a future income year when a lump sum is eventually transferred from a foreign superannuation fund to Australia. 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 - Transfer from Fund A to the Overseas Pension Scheme - Calculation of previously exempt fund earnings: As the transfer from Fund A to the Overseas Pension Scheme is a transfer between two foreign superannuation funds, the growth in Fund A will be set aside as 'previously exempt fund earnings.' As the Taxpayer became a member of Fund A before they became a resident of Australia, the growth in Fund A will be worked out in accordance with subsection 305-75(3) of the ITAA 1997, outlined above. The calculation of the total growth in Fund A in accordance with subsection 305-75(3) of the ITAA 1997 is shown in the table below. | Detailed Reasoning - A: Value of the Taxpayer's interest in Fund A on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to Fund A | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into Fund A | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in Fund A vested in the Taxpayer when the lump sum was paid to the Overseas Pension Scheme | 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 Previously Exempt 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): 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 Overseas Pension Scheme are eventually transferred to Australia. | Detailed Reasoning - Transfer from Fund B to the Overseas Pension Scheme - Calculation of previously exempt fund earnings: Similarly, as the transfer from Fund B to the Overseas Pension Scheme is also a transfer between two foreign superannuation funds, the growth in Fund B will also be set aside as 'previously exempt fund earnings.' As the Taxpayer became a member of Fund B before they became a resident of Australia, the growth in Fund B will be worked out in accordance with subsection 305-75(3) of the ITAA 1997. The calculation of the total growth in Fund B in accordance with subsection 305-75(3) of the ITAA 1997 is shown in the table below. | Detailed Reasoning - A: Value of the Taxpayer's interest in Fund B on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to Fund B | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into Fund B | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in Fund B vested in the Taxpayer when the lump sum was paid to the Overseas Pension Scheme | 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 Previously Exempt Fund Earnings ) (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - Q - P: 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 Overseas Pension Scheme are eventually transferred to Australia. | 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, 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 - Transfer from the Overseas Pension Scheme to the Australian Fund - Calculation of applicable fund earnings: The calculation of the applicable fund earnings for the lump sum received from the Overseas Pension Scheme is shown in the table below with reference to the facts of the case. As the Taxpayer became a member of the Overseas Pension Scheme after they became a resident of Australia, the growth in the Overseas Pension Scheme will be worked out in accordance with subsection 305-75(2) of the ITAA 1997, outlined earlier. As discussed above, any amounts in a foreign currency are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Amount attributable to contributions to the Overseas Pension Scheme made in respect of the taxpayer | Detailed Reasoning - B: Part of the lump sum attributable to amounts transferred from foreign funds | Detailed Reasoning - A + B: (The step outlined in paragraph 305-75(2)(a) of the ITAA 1997) | Detailed Reasoning - D: Amount in the Overseas Pension Scheme vested in the Taxpayer when the lump sum was transferred to the Australian Fund | Detailed Reasoning - D - C: (The step outlined in paragraph 305-75(2)(b) of the ITAA 1997) | Detailed Reasoning - F: Previously exempt fund earnings (if any) | Detailed Reasoning - G: E + F = Applicable Fund Earnings (The step outlined in paragraph 305-75(2)(c) of the ITAA 1997) | Detailed Reasoning - K - J + L: As per the previous calculations: L = [Z - (X + Y)] + [Q - P] | 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 Overseas Pension Scheme, 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. In order to make the election, the Taxpayer must submit the form Choice to have your Australian fund pay tax on a foreign super transfer (NAT11724) to their Australian superannuation fund. The Taxpayer may make the election up until the day they lodge their tax return for the year of the transfer (or if they do not need to lodge a tax return, the day they would have been required to lodge their tax return). This applies unless the governing rules of their Australian superannuation fund require them to make a choice earlier.

ATO view documents: 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