Private ruling: Lump sum payment from a foreign fund
Date of advice: 9 August 2016
Published: September 2016
Ruling period: Income year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is any part of the lump sum payment received by you from a foreign pension scheme assessable as applicable fund earnings in accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You held an interest in a foreign pension scheme (the Scheme) prior to becoming a resident of Australia for taxation purposes. The Scheme is a retirement fund established and managed outside Australia. Benefits in the Scheme are only payable in the foreign country upon reaching retirement age, or upon death. Early withdrawals for non-retirement purposes are not permitted. You became a resident of Australia for taxation purposes on the residency date. The value of your interest in the Scheme on the day before your residency date was nil. Since your residency date, you made contributions into the Scheme. There have been no transfers into the Scheme from other foreign pension schemes since becoming a resident of Australia. In the first quarter of 2015, you received a lump sum payment from the Scheme which represented your benefits in full. You no longer have an interest in the Scheme. The ATO website provides the exchange rate on the date of receipt.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 295-95(2). | Income Tax Assessment Act 1997 section 305-70. | Income Tax Assessment Act 1997 section 305-75. | Income Tax Assessment Act 1997 section 960-50. | Income Tax Assessment Act 1997 subsection 960-50(4). | Income Tax Assessment Act 1997 subsection 995-1(1). | Superannuation Industry (Supervision) Act 1993 section 10. | Superannuation Industry (Supervision) Act 1993 section 19. | Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision: Summary: A portion of the lump sum payment received from the Scheme should be included as applicable fund earnings in your assessable income in the 2014-15, income year. | 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, you provided evidence to indicate that the 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 you are assessed only on the income you earned on your benefits in the Scheme. Any amounts attributable to contributions made by you or on your behalf 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 - 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 is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 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 received from the Scheme is shown in the table below with reference to the facts of the case. As discussed above, any amounts in the foreign currency are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: Value of your interest in the Scheme on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Scheme | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Scheme vested in you when the lump sum was paid | 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 you were 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: Therefore, your applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 is $Y - X and should be included as assessable income in your income tax return for the 2014-15 income year.