Private ruling: Lump sum transfer from a foreign superannuation fund
Date of advice: 17 April 2019
Published: June 2019
Ruling period: Income year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the lump sum payment received from your foreign funds to an Australian superannuation fund 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 migrated to Australia as a Permanent Resident (the Residency Date) and has been an Australian resident for tax purposes since that date. The Taxpayer held an interest in Fund A, a defined benefit pension scheme established and controlled in the UK. The Taxpayer became a member of Fund B, which is a pension scheme established and controlled in the UK. The Taxpayer’s benefits in Fund A were transferred to Fund B. For the purposes of the Superannuation Industry (Supervision) Act 1993 (the SISA) and the ITAA 1997, Fund A and Fund B are deemed to be a foreign superannuation fund. The Taxpayer no longer has any interest in Fund A. For the purposes of the Superannuation Industry (Supervision) Act 1993 (the SISA) and the ITAA 1997, Fund A and Fund B are deemed to be foreign superannuation funds. The interest in Fund B was transferred to Fund C. This was the taxpayer’s entire interest in Fund C. Fund C is an Australian super fund which is a fully compliant scheme capable of receiving overseas pension transfers. In the 2016-17 income year a Private Ruling was issued. The ruling advised that the ‘applicable fund earnings’ amount in relation to the transfer from Fund A to Fund C is nil. This means that no part of the lump sum payment transferred by the Taxpayer from Fund A to Fund C will be included in the taxpayer’s assessable income for the 2016-17 income year. A calculation was provided in relation to ‘previous exempt fund earnings’. The taxpayer also had an account Fund D which was transferred from another foreign fund, Fund E. The entire interest in Fund D was transferred into Fund C. For the purposes of the Superannuation Industry (Supervision) Act 1993 (the SISA) and the ITAA 1997, Fund D and Fund E are deemed to be foreign superannuation funds. The taxpayer contends that there were no records of contributions or transfers in relation to Fund E. The published ATO foreign exchange rate was used at the date of transfer. There were no periods of non-residency since the Residency Date for the Taxpayer. The exchange rate published on the ATO website that applied on the transfer date was used.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Subsection 305-70(4) | Income Tax Assessment Act 1997 Subsection 305-75(2) | Income Tax Assessment Act 1997 Subsection 305-75(3) | Income Tax Assessment Act 1997 Subsection 305-75(4) | Income Tax Assessment Act 1997 Subsection 305-75(5) | Income Tax Assessment Act 1997 Subsection 305-75(6) | Income Tax Assessment Act 1997 Subsection 305-80(1) | Income Tax Assessment Act 1997 Subsection 305-80(2) | 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) | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: 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 has provided evidence to indicate that the Fund A, Fund B, Fund D and Fund E are foreign superannuation funds as defined by the ITAA 1997. When a taxpayer transfers an amount from a foreign superannuation fund to Australia, 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 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 The effect of subsection 305-75(3) of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the foreign fund. Any amounts attributable to contributions made by the Taxpayer and amounts attributable to transfers from other foreign funds do not form part of the taxable amount when the overseas benefit is paid. | Detailed Reasoning - Applicable fund earnings: An amount of ‘applicable fund earnings’ amount is worked out under section 305-75 of the ITAA 1997. Where the Taxpayer became an Australian resident after the start date of the period to which a 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 became 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; (ii) 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) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6). Where the Taxpayer is an Australian resident at all times to which a lump sum relates, the applicable fund earnings are worked out in accordance with 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). | 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. Therefore, for the purposes of section 305-70 of the ITAA 1997, the ‘applicable fund earnings’ amount in respect of lump sum transfers from a foreign superannuation fund is translated using the exchange rate applicable on the day of receipt of the lump sum. | Detailed Reasoning - Transfer from Fund B to Fund C: The method in subsection 305-75(2) is used to work out the amount of applicable fund earnings in respect of this payment because you were an Australian resident for the period to which the payment relates. In this case, the amount of applicable fund earnings will be the total amount in Fund B vested in you at the time of the payment less the part of the lump sum that is attributable to amounts transferred into Fund B from Fund A plus the total of all your previous exempt fund earnings. The amount in Fund B vested in you when the lump sum was paid was provided. Item 11 of the table in subsection 960-50(6) of the ITAA 1997 will apply to the receipt of the lump sum payment. Therefore this amount will be translated at the exchange rate applying on the date the payment was received. 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) into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. The part of the lump sum attributable to amounts transferred into Fund B from Fund A was provided. While you transferred in more than this, “the part” of the lump sum attributable to amounts transferred in cannot be greater than the amount of the lump sum payment. Item 11A of the table in subsection 960-50(6) of the ITAA 1997 applies to this amount because it is not a receipt or a payment and none of the earlier items in the table apply. This amount will be translated at an exchange rate that is reasonable in the circumstances. In accordance with ATO ID 2015/7, the foreign currency translation rules applied to these amounts is to use the exchange rage applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent. The ATO published rate of exchange rate was used. Under 305-70(2) of the ITAA 1997 you are required to include in your assessable income “so much of the lump sum” as equals applicable fund earnings. In this case the amount of applicable fund earnings will be the total amount in Fund E vested in the Taxpayer at the time of the payment less the part of the lump sum that is attributable to amounts transferred into Fund B to Fund C plus the total of all previously exempt fund earnings. Therefore, the ‘applicable fund earnings’ amount in respect of the lump sum payment transferred from Fund B that should be included in the Taxpayer’s assessable income was provided. | Detailed Reasoning - Transfer from Fund E to Fund D: An assumption was made about the amount vested in Fund E on the start date. 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 If a taxpayer received more than one lump sum payment from an overseas superannuation fund, subsection 305-75(4) of the ITAA 1997 will apply alongside subsection 305-75(3) of the ITAA 1997 in relation to any lump sum payments beyond the first. According to subsection 305-75(4) of the ITAA 1997: (4) Any part of the lump sum that is paid into another foreign superannuation fund is not assessable income and is not exempt income. 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 Aviva 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 the Taxpayer or transfers from other foreign funds also do not form part of the taxable amount when the overseas benefit is paid. As such, no part of the lump sum payment from Fund E to Fund D that occurred in 2005-2006 income year would need to be included in the Taxpayer’s assessable income. However, when the Taxpayer’s interest in Fund E is eventually transferred to the Taxpayer at a later time, their applicable fund earnings in relation to this later lump sum payment will include an amount of previously exempt fund earnings, which is defined under subsection 305-75(5) of the ITAA 1997: (5) 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 income 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. In effect, the amount of previously exempt fund earnings in relation to the later transfer will be equal to the amount earned in Fund D during the period between the Residency Date and the date provided in 2005-2006 income year. | Detailed Reasoning - Transfer from Fund D to Fund C: As you transferred funds from Fund E to Fund D, there is an amount of previous exempt fund earnings in relation to the later payment from Fund D to Fund C. The amount of previous exempt fund earnings was provided; being the amount transferred less the amount in Fund E vested in you just before you became a resident. The method in subsection 305-75(2) is used to work out the amount of applicable fund earnings in respect of this payment because you were an Australian resident for the period to which the payment relates. In this case the amount of applicable fund earnings will be the total amount in Fund D vested in you at the time of the payment less the part of the lump sum that is attributable to amounts transferred into Fund C from Fund D plus the total of all your previous exempt fund earnings. The amount in Fund D vested in you when the lump sum was paid was provided. As you had already converted your interest in Fund E into an Australian dollar denominated investment it is not necessary to translate this amount. The part of the lump sum attributable to amounts transferred was provided. In accordance with ATO ID 2015/7, the Commissioner considers that, in the circumstances of this payment, the exchange rate at which it is reasonable to translate this amount is the exchange rate applying on the date the Taxpayer converted the investment in Fund D into an Australian dollar denominated investment. The published ATO rate was used. The Commissioner considers that, in the circumstances of this payment, the exchange rate at which it is reasonable to translate this amount is the exchange rate applying on the date you converted your investment in Fund D into an Australian dollar denominated investment. Therefore, the ‘applicable fund earnings’ amount in respect of the lump sum payment transferred from Transact that should be included in the Taxpayer’s assessable income. | Detailed Reasoning - Election: A taxpayer who is transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the applicable fund earnings treated as the assessable income of the Australian superannuation fund. As a result, the amount specified in the election notice will be included in the assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal tax rate. To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1) of the ITAA 1997). If the Taxpayer no longer has an interest in the overseas funds, they may be eligible to make the election.