Private ruling: Lump sum transfer from a foreign superannuation fund
Date of advice: 29 August 2017
Published: December 2017
Ruling period: Income year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is any part of the benefit received by the taxpayer from an overseas pension scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: The Taxpayer arrived in Australia from an overseas country in 200X on a tourist visa. They were granted a series of further tourist visas between 200X and 200Y. The Taxpayer applied for a spouse residence visa lodged in 200Y and it was granted in 200Z. In 200A they moved into their now spouse’s house. The Taxpayer Australian resident for tax purposes since the Residency Date. The Taxpayer held an interest in a pension scheme established and controlled in a foreign country (Foreign Pension Scheme 1). In 201X, the Taxpayer transferred the balance of the Foreign Pension Scheme 1 to the Foreign Pension Scheme 2, which is also a pension scheme established and controlled in an overseas country. The Taxpayer provided evidence to indicate that the Foreign Pension Scheme 1 and the Foreign Pension Scheme 2 are foreign superannuation funds. The value of the Taxpayer’s benefits transferred from the Foreign Pension Scheme 1 to the Foreign Pension Scheme 2 in 201X was a certain value. In 201Y, the entirety of the Taxpayer’s benefits in the Foreign Pension Scheme 2 was transferred to a complying superannuation fund in Australia (the Australian Fund).

Relevant legislative provisions: Income Tax Assessment Act 1997 section 305-55 | Income Tax Assessment Act 1997 section 305-60 | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75 | Income Tax Assessment Act 1997 section 305-80 | Income Tax Assessment Act 1997 section 960-50 | Income Tax Assessment Act 1997 subsection 960-50(1) | Income Tax Assessment Act 1997 subsection 960-50(4)

Reasons for decision: Summary: A portion of the lump sum payment transferred by the Taxpayer from the Foreign Pension Scheme 2 to the Australian Fund will be included as assessable ‘applicable fund earnings’ in the Taxpayer’s income tax return for the 201X-1Y income year. | Detailed Reasoning - Lump sum payments received from certain foreign superannuation funds: Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) deals with superannuation benefits paid from foreign superannuation funds. Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death. Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income. That is, it is tax-free (sections 305-60 of the ITAA 1997). Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income. The Taxpayer became a resident of Australia for tax purposes in 200A. The Taxpayer’s benefits were transferred to the Australian Fund in 201Y. As this was more than six months after the Taxpayer became an Australian resident, section 305-70 of the ITAA 1997 applies to the payment so that an amount of applicable fund earnings (if any) is included in their assessable income for the 201X-1Y income year. | Detailed Reasoning - Applicable fund earnings: The ‘applicable fund earnings’ amount is worked out under section 305-75 of the ITAA 1997. As the Taxpayer 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 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 section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the Foreign Pension Scheme 2 during the relevant period. Earnings made during periods of non-residency, contributions, and transfers into the paying fund do not form part of the taxable amount when the 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. For the purposes of section 305-70 of the ITAA 1997, the ‘applicable fund earnings’ amount in respect of the lump sum received from the Foreign Pension Scheme 2 should be calculated by deducting the Australian dollar equivalent of the amount vested in the Taxpayer just before the Residency Date from the amount vested in the Taxpayer on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt. | 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 If the Taxpayer no longer has an interest in the Foreign Pension Scheme 2, they will be 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.