Private ruling: Lump sum transfers from a foreign superannuation fund
Date of advice: 20 January 2020
Published: March 2020
Ruling period: 1 July 2018 to 30 June 2019.
Date scheme commenced: 1 July 2018.

Ruling: Q1: Is any part of the terminal gratuity lump sum payment received by the taxpayer from the foreign fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, the applicable fund earnings are $x,xxx. | Q2: If any part of the lump sum payment received by the taxpayer is assessable, is there an undeducted purchase price? | A2: No, the lump sum does not have an undeducted purchase price.

Relevant facts and circumstances: The taxpayer became a resident of Australia for taxation purposes on XXYYZZ. While living in the Country A, the taxpayer became a member of the foreign fund which is a non-contributory pension scheme. Under the rules of the foreign fund, as the taxpayer has completed 9 years of eligible service, they are entitled to a lump sum payment called a terminal gratuity when they reach age 60. This is a separate payment that is received in addition to the service pension. The administrators of the foreign fund are unable to provide the amount in the scheme that was vested in the taxpayer on XXYYZZ. We have estimated and the taxpayer agreed to the value of the taxpayer's benefit in the foreign fund on XXYYZZ There have been no contributions into the foreign fund since the taxpayer became an Australian resident for tax purposes. There have been no transfers into the foreign fund since the taxpayer became an Australian resident for tax purposes. There were no previously exempt fund earnings relating to the lump sum your client received. On a specific date, the taxpayer received a lump sum payment from the foreign 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 305-80 | Income Tax Assessment Act 1997 Section 960-50 | Income Tax Assessment Act 1997 Subsection 995-1(1). Reasons for decision | Question 1 | If an individual taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, the taxpayer's assessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while the taxpayer was an Australian resident. | In this case, the foreign fund is a foreign superannuation fund. The taxpayer became an Australian resident after the start of the period to which the lump sum relates. The taxpayer did not remain an Australian resident at all times until the lump sum was paid. Therefore, the applicable fund earnings is calculated in accordance with subsection 305-75(3) of the ITAA 1997. | The effect of section 305-75 of the ITAA 1997 is that the individual taxpayer is only assessed on the income they earned on their benefits in the foreign fund while they were an Australian resident. Earnings during periods of non-residency, contributions and transfers into the foreign fund are not taxable when the overseas benefit is paid. | An amount of applicable fund earnings may also include amounts of previously exempt fund earnings which occur where an amount in a foreign super fund is transferred to another foreign super fund before being received in Australia. These earnings would not otherwise be included and are set aside until the lump sum is transferred to you, or your complying Australian super fund. | The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in ATO Interpretative Decision ATO ID 2015/17: Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997 (ATO ID 2015/7). We use the exchange rate that applied when the taxpayer received the lump sum, to work out the Australian dollar equivalent for the amount in the foreign superannuation fund that was vested in the taxpayer on a certain date. | Using the applicable AUD/XYZ exchange rate as ata specific date, the 'applicable fund earnings' amount has been calculated in accordance with subsection 305-75(3) of the ITAA 1997. | The taxpayer should include their applicable fund earnings (if any) in their assessable income for the 2018-19 income year. | Question 2 | If your client has income from a foreign pension or annuity, they may be entitled to claim a deduction to reduce the taxable amount if their pension or annuity has an undeducted purchase price (UPP). | The UPP is the amount the taxpayer contributed towards the purchase price of their pension or annuity (i.e. their personal contributions). | The facts of this case suggest that there is no need for your client to calculate an UPP regarding the lump sum payment they received.