Private ruling: Lump sum transfer from foreign superannuation fund
Date of advice: 27 June 2018
Published: September 2018
Ruling period: Income year ended 30 June 20xx.
Date scheme commenced: 1 July 20xx.

Ruling: Q1: Is any part of the benefit transferred 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: Yes

Relevant facts and circumstances: The Taxpayer migrated to Australia in 20xx on a temporary visa. The Taxpayer held an interest in a pension scheme established and controlled in a foreign country (Foreign Pension Scheme 1). In 20xx, the Taxpayer intended to transfer his entire benefit in the Foreign Pension Scheme 1 to a complying Australian Superannuation Fund. However, issues surrounding compliance at the time meant that the transfer did not proceed. The Taxpayer instead elected to transfer the entire benefits from his foreign pension scheme 1 into a different foreign country (Foreign Pension Scheme 2). The transfer was received in foreign currency in the Foreign Pension Scheme 2 in 20xx. The Taxpayer could not access his benefits in either foreign pension scheme other than at retirement in the respective foreign countries. Aside from the initial payment, there have been no contributions to the Foreign Pension Scheme 2 since the Taxpayer migrated to Australia. In 20xx, the Taxpayer’s entire benefits in the Foreign Pension Scheme 2 were transferred to a complying Australian superannuation fund (the Australian Fund). The exchange rate on the transfer date was published on the Australian Taxation Office’s (ATO) website.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Subsection 305-70(1) | Income Tax Assessment Act 1997 Section 305-75 | 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(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 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: Summary: A portion of the lump sum payment transferred from the Foreign Pension Scheme 2 must be included as assessable ‘applicable fund earnings’ in the Taxpayer’s tax return for the 20xx-xx income year. As the Taxpayer no longer has an interest in the Foreign Pension Scheme 2, the Taxpayer will be eligible to make an election to have any applicable fund earnings treated as the assessable income of his 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 both the foreign pension schemes are 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; (a) 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); (b) 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; (a) 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); (b) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; (c) 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 growth in the fund is set aside as future ‘previously exempt fund earnings,’ for when a lump sum is paid from a foreign superannuation fund to Australia in the future. 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 the Foreign Pension Scheme 1 to the Foreign Pension Scheme 2 – Calculation of previously exempt fund earnings: As the transfer from the Foreign Pension Scheme 1 to the Foreign Pension Scheme 2 is a transfer between two foreign superannuation funds, the growth in the Foreign Pension Scheme 1 will be set aside as future ‘previously exempt fund earnings.’ As the taxpayer became a member of the Foreign Pension Scheme 1 before they became a resident of Australia, the growth in the Foreign Pension Scheme 1 will be worked out in accordance with subsection 305-75(3) of the ITAA 1997, outlined above. The calculation of the total growth in the Foreign Pension Scheme 1 in accordance with subsection 305-75(3) of the ITAA 1997 is shown in the table below. | Detailed Reasoning - A: Agreed estimated value of the taxpayer’s interest in the Foreign Pension Scheme 1 on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Foreign Pension Scheme 1 | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into the Foreign Pension Scheme 1 | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Foreign Pension Scheme 1 vested in the taxpayer when the lump sum was paid to the Foreign Pension Scheme 2 | 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 future Previously Exempt Fund Earnings ) (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) Therefore, the future ‘previously exempt fund earnings’ of the payment transferred from the Foreign Pension Scheme 1 to the Foreign Pension Scheme 2 is calculated in accordance with the above . 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) on the date the funds in the Foreign Pension Scheme 2 were transferred to Australia. | Detailed Reasoning - Foreign currency conversion: 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. In other words, the amount of ‘previously exempt fund earnings’ in this case must be converted into Australia dollars using the exchange rate on the date on which the Taxpayer’s superannuation monies were transferred to Australia. | Detailed Reasoning - Transfer from the Foreign Pension Scheme 2 to the Australian Fund: As the Taxpayer became a member of the Foreign Pension Scheme 2 after they became a resident of Australia, the growth in the Foreign Pension Scheme 2 will be worked out in accordance with subsection 305-75(2) of the ITAA 1997, outlined earlier. The calculation of the applicable fund earnings for the lump sum received from the Foreign Pension Scheme 2 is shown in the table below. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Part of the lump sum attributable to contributions to the Foreign Pension Scheme 2 | Detailed Reasoning - B: Part of the lump sum attributable to amounts transferred from foreign funds into the Foreign Pension Scheme 2 | Detailed Reasoning - A + B: (The step outlined in paragraph 305-75(2)(a) of the ITAA 1997) | Detailed Reasoning - D: Amount in the Foreign Pension Scheme 2 vested in the Taxpayer when the lump sum was paid | 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) As in previous table | Detailed Reasoning - G: E + F = Applicable Fund Earnings (The step outlined in paragraph 305-75(2)(c) of the ITAA 1997) Therefore, a portion of the lump sum payment transferred from the Foreign Pension Scheme 2 to the Taxpayer’s Australian must be included as assessable ‘applicable fund earnings’ in the Taxpayer’s assessable income for the 2017-18 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 has transferred the entirety of their benefits in the Foreign Pension Scheme 2, the Taxpayer no longer has an interest in the overseas fund. 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 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.