Private ruling: Lump sum transfer from foreign super fund
Date of advice: 30 June 2017
Published: October 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is any part of the lump sum benefit paid from the Taxpayer’s policy’s with the Foreign Fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes Issue 2 Entitlement to foreign income tax offset | 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 Overseas in respect of the lump sum payment in accordance with section 770-10 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: In the 199X-9Y income year (the Residency date) the Taxpayer migrated from overseas and became an Australian resident for tax purposes. While living overseas, the Taxpayer had three policies (policy A, B and C) with an overseas retirement annuity fund (the Foreign Fund). The Foreign Fund aims to enable its members to make provisions for their retirement and, in case of a member’s death before retirement, death benefits to their dependents. Under the rules of the Foreign 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 amount in policy A vested in the Taxpayer on the day before the Residency date, was X. The amount in policy B vested in the Taxpayer on the day before the Residency date, was Y. The amount in policy C vested in the Taxpayer on the day before the Residency date, was Z. In the 2016-17 income year, the Taxpayer surrendered policy A. The payment for the policy was X1. In the 2016-17 income year, the Taxpayer surrendered policy B. The payment for the policy was Y1. In the 2016-17 income year, the Taxpayer surrendered policy C. The payment for the policy was Z1. The net amount of each policy was placed into the Taxpayer’s overseas bank account. Upon withdrawal, the overseas bank account paid an amount to the Taxpayer’s Australian bank account representing the net payment for each policy plus interest and deducting bank fees and administration charges. Taxpayer has no remaining interest in the overseas foreign superannuation fund after the transfer. Since become an Australian resident, the Taxpayer did not make any contributions into the Foreign Fund. The Taxpayer is over the age of 55.

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 960-50. | Income Tax Assessment Act 1997 subsection 995-1(1). | Income Tax Assessment Act 1997 Section 770-10

Reasons for decision: Summary: An amount should be included in the Taxpayer’s tax return for the 2016-17 income year as assessable 'applicable fund earnings’ in respect of the lump sum benefit received from policy A, B and C. The Taxpayer is 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 2016-17 income year. | Detailed Reasoning - Lump sum payments received from certain foreign superannuation funds: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received or transferred more than six months after a person has become an Australian resident, is assessable under section 305-70 of the ITAA 1997. The applicable fund earnings are subject to tax at the person’s marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income. 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 becomes an Australian resident after the start of 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, section 305-70 of the ITAA 1997 will not have any application. | Detailed Reasoning - Foreign superannuation fund: A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows: (a) a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and (b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year. Subsection 295-95(2) of the ITAA 1997 defines Australian superannuation fund as follows: A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if: (a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and (b) at that time, the central management and control of the fund is ordinarily in Australia; and (c) at that time either the fund had no member covered by subsection (3) (an active member ) or at least 50% of: (i) the total market value of the fund’s assets attributable to superannuation interests held by active members; or (ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members; is attributable to superannuation interests held by active members who are Australian residents. Thus, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a 'foreign superannuation fund’. The fact that some of its members may be Australian residents would not necessarily alter this. Benefits in the Foreign Fund are secured until normal retirement age. Normal retirement date is age 60, although earlier or later retirement is possible. As the Foreign Fund is set up for the express purpose of providing for the payment of benefits in the nature of superannuation it meets the definition of superannuation fund. As the Foreign Fund’s central management and control is clearly not in Australia it is evident that the Foreign Fund is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner considers that the Foreign Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: As noted above, 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 a person has become an Australian resident. The Taxpayer became a resident of Australia for tax purposes in the 199X-9Y (the residency date). The Taxpayer received payments for policy A, B and C more than six months after they became an Australian resident. Accordingly, a portion of the lump sum benefit will be assessable under section 305-70 of the ITAA 1997. The amount included as assessable income is calculated under subsection 305-75(3) of the ITAA 1997 because the Taxpayer became an Australian resident after the start of the period to which the lump sum relates. Subsection 305-75(3) states: If you become an Australian resident after the start of the period to which the lump sum relates (but before you 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 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 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 calculation of this portion effectively means that the Taxpayer will be assessed only on the income earned while the Taxpayer was a resident of Australia. That is, the Taxpayer will only be assessed on the accretion in their benefits less any contributions made since they became a resident of Australia. Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the paying fund 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 (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 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. | Detailed Reasoning - Calculation of the assessable amount of the lump sum: The amount in the policy A, B and C on the date before the Taxpayer became a resident of Australia was X, Y and Z respectively. The X, Y and Z are converted into Australian dollars using the daily exchange rate on the date the policy was surrendered. In the 2016-17 income year the Taxpayer surrendered policy A, B and C. The payment for the policy was X1, Y1 and Z1. These amounts are converted to Australian dollars. The period for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In the Taxpayer’s case, that period is from the day before residency to the date of withdrawal and the Taxpayer was a resident for the whole of that period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1. There are no previously exempt fund earnings in relation to the lump sum. Calculation of the assessable amount of lump sum payment In accordance with subsection 305-75(2) of the ITAA 1997, the amounts determined at subparagraphs 305-75(2)(a)(i) and (ii) are added. This total is then subtracted from the amount that was vested in the Taxpayer when the lump sum was paid. To this figure we add the amount determined under paragraph 305-75(2)(c) of the ITAA 997. The amount worked out above represents the Taxpayer’s assessable 'applicable fund earnings’ in respect of the lump sum received from Policy A, B and C. This amount should be included in your income tax return for the 2016-17 income year. | Detailed Reasoning - Foreign income tax offset: Subsection 770-10(1) of the ITAA 1997 provides the basic entitlement rule for a foreign income tax offset (FITO) and states: You are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. To determine the amount of FITO in any particular year, a person must first calculate the total foreign income tax paid on amounts included in their assessable income for the year. In your case you will need to include an amount of $X,XXX ( XX,XXX tax paid in Overseas) in your assessable income. The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset. The FITO rules do not allow for the carry forward of excess foreign tax. This means that all available FITOs will need to be utilised in the year in which they arise. There will be no opportunity to carry them forward for use against future Australian tax on foreign income. Furthermore, there is a FITO limit. Where the total foreign income tax paid by a person is less than or equal to $1,000, the person is not required to calculate the FITO, i.e. the person's FITO will equal the foreign income tax paid on amounts included in the their assessable income. Where the total foreign income tax paid is more than $1,000, the person can choose to offset only $1,000 of foreign tax (and not formally calculate the FITO entitlement) or calculate the offset limit to determine the maximum FITO entitlement under section 770-75 of the ITAA 1997. | Detailed Reasoning - Note: Further information regarding calculating a FITO can be obtained from the booklet entitled Guide to foreign income tax offset rules 2016 (NAT 72923) which can be obtained from the ATO website www.ato.gov.au.