Private ruling: Lump sums received from certain foreign superannuation funds
Date of advice: 20 June 2016
Published: August 2016
Ruling period: Income year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Where Your Client receives a lump sum death benefit payment from a foreign superannuation fund, is a portion of the lump sum assessable as 'applicable fund earnings' under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: Your client (Your Client) became a resident of Australia for tax purposes in the 20aa-bb income year (the Residency Date) Your Client has been a tax resident at all times since the Residency Date. The Deceased, Your Client's sibling, passed away in the 20xx-yy income year. The Deceased, who was a foreign resident and had never been an Australian resident, became a member of an overseas pension scheme (the Overseas Pension Scheme) in the 20cc-dd income year. The Overseas Pension Scheme is a defined benefits scheme where benefits are only payable if the member attains retirement age or becomes deceased. The Overseas Pension Scheme satisfies the definition of a 'foreign superannuation fund.' You have provided the amount vested in the Overseas Pension Scheme on the day just before Your Client became a resident of Australia. Your Client and two other beneficiaries were entitled to a death benefit payment from the Overseas Pension Scheme. In the 20xx-yy income year, Your Client was entitled to a death benefit payment. The death benefit payment represents a proportion of the total value of benefits in the Overseas Pension Scheme. The payment was made in the 20yy-zz income year. No contributions have been made to the Overseas Pension Scheme since Your Client became a resident of Australia. No amounts have ever been transferred into the Overseas Pension Scheme from any other foreign superannuation fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 305-B | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75. | Income Tax Assessment Act 1997 section 960-50.

Reasons for decision: Summary: The applicable fund earnings amount in respect of the lump sum received by Your Client from the Overseas Pension Scheme should be included in Your Client's assessable income for the 20yy-zz income year. | Detailed Reasoning - Lump sum payments received from certain foreign superannuation funds: Subdivision 305-B of the 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. Your Client became a resident of Australia for tax purposes in the 20aa-bb income year. Your Client's benefits in the Overseas Pension Scheme were transferred to the Australian Fund in the 20yy-zz income year. As this was more than six months after Your Client 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 20yy-zz income year. | Detailed Reasoning - Applicable fund earnings: The 'applicable fund earnings' is the amount worked out under either subsections 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. In Your Client's case, the amount included as assessable income is calculated under subsection 305-75(3) of the ITAA 1997 because they became an Australian resident after the start of the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 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 income 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(3) of the ITAA 1997 is that Your Client is assessed only on the income earned while they were a resident of Australia. That is, Your Client is only 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 amount 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 considers what is the correct rule for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' under section 305-75 of the ITAA 1997 and states that each amount in a foreign currency that is an element in the calculation is to be translated to Australian dollars at 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 should be calculated by deducting the Australian dollar equivalent of the amount in the Overseas Pension Scheme vested in Your Client just before the day they first became an Australian resident, from the amount received from the Overseas Pension Scheme. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum. | Detailed Reasoning - Calculation of the assessable amount of the payment from the Overseas Pension Scheme: In accordance with 305-75(3) of the ITAA 1997, the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added. This total is then subtracted from the amount determined under paragraph 305-75(3)(b) of the ITAA 1997. This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997. To this figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997. The amount worked out above represents Your Client's assessable 'applicable fund earnings' in respect of the lump sum received from the Overseas Pension Scheme. This amount should be included in their 20yy-zz income tax return.