Private ruling: Lump sum transfer from a foreign superannuation fund
Published: July 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: 1. Will any part of a proposed transfer from an overseas pension scheme to an Australian superannuation fund assessable as 'applicable fund earnings' under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: 1. Yes

Relevant facts and circumstances: An individual (the Taxpayer) was a member of a pension scheme established and controlled in an overseas territory (the Overseas Pension Scheme). The Taxpayer first arrived in Australia during the relevant income year but had only intended to stay on a temporary basis. The Taxpayer left Australia soon after. Later in the relevant income year, the Taxpayer arrived in Australia for a second time and has continued to live in Australia since that date. The Taxpayer applied for a Partner (Residence) Visa soon after arrival and was granted permanent residence during the 20XX-XX income year. The Taxpayer provided evidence to indicate that the Overseas Pension Scheme was a foreign superannuation fund. There were no contributions or pension amalgamations to the Overseas Pension Scheme while the Taxpayer was a resident of Australia. The Taxpayer intends to transfer the entirety of their benefits in the Overseas Pension Scheme to a complying superannuation fund in Australia (the Australian Fund) in the 2015-16 income year. The Taxpayer was unable to provide the value of their interest in the Overseas Pension Scheme on the day before the residency date. The Taxpayer was able to provide the value of the their interest in the Overseas Pension Scheme on a certain date in the 20XX-XX income year and on another date in the 2015-16 income year. The Taxpayer and the Australian Taxation Office have agreed to an estimation methodology for calculating the value of the Taxpayer's benefits in the Overseas Pension Scheme on the day before the residency date. The estimate will be determined by using the known values on the two dates above to calculate a rate of growth, and then using this rate of growth to estimate the value of the Taxpayer's benefits on day before the residency date.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 subsection 305-75(3) | Income Tax Assessment Act 1997 paragraph 305-75(3)(a) | Income Tax Assessment Act 1997 paragraph 305-75(3)(b) | Income Tax Assessment Act 1997 paragraph 305-75(3)(c) | 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 to be transferred by the Taxpayer from the Overseas Pension Scheme to the Australian Fund should be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 2015-16 income year. | Detailed Reasoning - Detailed reasoning: ' Foreign superannuation fund ' is defined in subsection 995-1(1) of the ITAA 1997. In this case, the Taxpayer provided evidence to indicate that the Overseas Pension Scheme is a foreign superannuation fund as defined by the act. Typically, 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, 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 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 Overseas Pension Scheme during the period in which they were a resident of Australia. 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 - Date of residency: For the purpose of the calculation of applicable fund earnings under section 305-75 of the ITAA 1997, we need to determine the date on which a taxpayer became an 'Australian resident.' The relevant date is the date on which the Taxpayer became an Australian resident for taxation purposes. This is typically different to date on which the Taxpayer became a permanent resident for immigration purposes. The Commissioner's views on residency are outlined in Taxation Ruling TR 98/17 (TR 98/17) entitled 'Income tax: residency status of individuals entering Australia . ' According to paragraphs 23 and 25 of TR 98/17: 23. When behaviour consistent with residing here is demonstrated over a considerable time, an individual is regarded as a resident from the time the behaviour commences. … 25. If individuals enter Australia intending to remain for less than six months but later events extend their stay beyond six months, they are regarded as residents from their arrival, as long as their presence has an habitual and routine character during the entire period. Furthermore, according to paragraph 16 of TR 98/17: 16. A migrant who comes to Australia intending to reside here permanently is a resident from arrival. In the current case, the Taxpayer first arrived in Australia during the relevant income year. However, the Taxpayer did not have an intention to reside in Australian permanently and instead departed Australia soon after. The Taxpayer arrived in Australia for a second time on a later date in the relevant income year and displayed an intention to reside here permanently. This is evidenced by the fact that the Taxpayer made an application for a Partner Visa soon after arrival and has lived in Australia since that date. Therefore, the Taxpayer's date of residency in this case is the date on which they arrived in Australia for a second time. | 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 - Applicable fund earnings amount - Calculation: The calculation of the applicable fund earnings for the lump sum to be transferred from the Overseas Pension Scheme is shown in the table below. 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: Agreed estimated value of the Taxpayer's interest in the Overseas Pension Scheme on the day before the date of residency | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the overseas pension scheme | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into the overseas pension scheme | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Overseas Pension Scheme when the lump sum is to be transferred to the Australian Fund in the 2015-16 income year | 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 date of residency 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 (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - Y - X: The result of the calculation above is the amount of 'applicable fund earnings' in respect of the lump sum payment to be transferred from the Overseas Pension Scheme that should be included in the Taxpayer's assessable income for the 2015-16 income year. | 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 intends to transfer the entirety of their benefits in the Overseas Pension Scheme, the Taxpayer will not have an interest in the Overseas Pension Scheme immediately after the payment. This means that 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 Australian 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.