Private ruling: Lump sum transfer from a foreign fund
Date of advice: 31 July 2019
Published: October 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is any part of the lump sum payment received by the Taxpayer from their three foreign funds 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 became a resident of Australia for taxation purposes during the 2006-07 income year. Prior to arriving in Australia the Taxpayer was employed overseas and became a member of three foreign retirement funds -Foreign Fund 1, Foreign Fund 2, and Foreign Fund 3. On the day before the residency date, the value of the two foreign funds was approximately known. On a day in the 2018-19 income year (Transfer Date 1), the Taxpayer transferred the balance of their Foreign Fund 1 to their Australian complying superannuation fund (the Australian Fund). On a later day in the 2018-19 income year (Transfer Date 2), the Taxpayer transferred the balance of Foreign Fund 2 and Foreign Fund 3 to the Australian Fund. The balance transferred from each foreign fund to the Australian Fund was known. There were no contributions or amalgamations to Foreign Fund 1, Foreign Fund 2 or Foreign Fund 3 since the Taxpayer arrived in Australia. The exchange rate that applied on Transfer Date 1 was a certain rate. The exchange rate that applied on Transfer Date 2 was a certain rate.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75

Reasons for decision: Summary: 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 three overseas funds are foreign superannuation funds. The Taxpayer was an Australian resident at all times during the period to which the lump sum relates. Therefore, the applicable fund earnings is calculated in accordance with subsection 305-75(2) 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. When calculating the applicable fund earnings, subsection 305-75(4) of the ITAA 1997 must also be considered. Subsection 305-75(4) states how the calculations under subsections 305-75(2) and (3) apply if the relevant superannuation lump sum is not the first lump sum paid from a foreign super fund. Therefore, where the lump sum is not the first lump sum from the fund, the start day for the purposes of the calculation is the day after the most recent lump sum was received. 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 . We use the exchange rate that applied when the Australian superannuation fund 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 exchange rates applicable on the day of receipt of the lump sums, the 'applicable fund earnings' amount has been calculated in accordance with subsection 305-75(2) of the ITAA 1997. The Taxpayer should include his total applicable fund earnings (calculated as shown in the tables below) in his assessable income for the 2018-19 income year: | Detailed Reasoning - Description: Amount ( £) | Detailed Reasoning - A: Approximate value of the Taxpayer's interest in the Foreign Fund 1 on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Foreign Fund 1 | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into Foreign Fund 1 | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in Foreign Fund 1 vested in the Taxpayer when the lump sum was paid to the Australian Fund | 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 (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - Description: Amount ( £) | Detailed Reasoning - A: Approximate value of the Taxpayer's interest in the Foreign Fund 2 on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Foreign Fund 2 | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into Foreign Fund 2 | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in Foreign Fund 2 vested in the Taxpayer when the lump sum was paid to the Australian Fund | 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 (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) | Detailed Reasoning - Description: Amount ( £) | Detailed Reasoning - A: Approximate value of the Taxpayer's interest in the Foreign Fund 3 on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Foreign Fund 3 | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into Foreign Fund 3 | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in Foreign Fund 3 vested in the Taxpayer when the lump sum was paid to the Australian Fund | 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 (The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997) As such, the applicable fund earnings (converted into Australian dollars at the exchange rate applicable on the day of receipt in Australia) is the total of the applicable fund earnings in relation to Foreign Fund 1, Foreign Fund 2 and Foreign Fund 3. If the amount the Taxpayer transfers is the entire amount in their foreign super funds to a complying Australian super fund, they can elect for the fund to include the applicable fund earnings in the fund's assessable income for the 2018-19 income year. To make this choice, they should complete the Completing your choice to have your Australian fund pay tax on a foreign super transfer (NAT11724) form and include the above amount at question 16. If they choose this option, they do not need to declare the amount in their assessable income for the 2018-19 income year. This election cannot be varied or revoked. The election must be made before they lodge their income tax return for the same income year.