Private ruling: Lump sum payments from a foreign superannuation fund
Date of advice: 19 September 2016
Published: November 2016
Ruling period: Income year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is any part of the lump sum received by a person (the Client) from an overseas pension scheme (the Foreign Scheme) 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 Client migrated to Australia from an overseas country and became a resident of Australia for taxation purposes many years ago. While living in the overseas country, the Client became a member of the Foreign Scheme. A pension is usually payable from the Foreign Scheme at a person's normal pension age which is linked to their state pension age (with a minimum of age 65). The administrators of the Foreign Scheme are unable to provide the amount in the Foreign Scheme that was vested in the Client on the day before the residency date. The Client has agreed to an estimated value of their benefit in the Foreign Scheme as at the day before the residency date. There have been no contributions or transfers to the Foreign Scheme since the Client migrated to Australia. During the 2015-16, income year the Client received a lump sum from the Foreign Scheme. The Foreign Scheme is considered to be a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 305-B | Income Tax Assessment Act 1997 section 305-60 | 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 995-1(1)

Reasons for decision: Summary: A portion of the lump sum received by the Client from the Foreign Scheme is to be included in their assessable income for the 2015-16 income year as the 'applicable fund earnings' amount in respect of the lump sum they received from the Foreign Scheme. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: Tax treatment of lump sums received from certain foreign superannuation funds is set out in Subdivision 305-B of the ITAA 1997. Section 305-55 of the ITAA 1997 restricts the application of Subdivision 305-B of the ITAA 1997 to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death. In accordance with sections 305-60 of the ITAA 1997, 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. If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable income. In this case, based on the information provided, the Foreign Scheme is considered to be a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997. The Client became a resident of Australia many years ago and received a lump sum from the Foreign Scheme during the relevant income year. As the Client received the lump sum more than six months after their residency, section 305-70 of the ITAA 1997 applies to the lump sum received so that the amount of applicable fund earnings (if any) in respect of the lump sum is included in the Client's assessable income for the relevant income year. | Detailed Reasoning - Applicable fund earnings: The applicable fund earnings amount is worked out under either subsection 305-75(2) or (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. As the Client became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings amount is worked out in accordance with 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). *To find definitions of asterisked terms, see the Dictionary, starting at section 995-1 The effect of section 305-75 of the ITAA 1997 is that the Client is assessed only on the income they earned on their benefits in the Foreign Scheme during the relevant period. Earnings made during periods of non-residency, and contributions and transfers into the Foreign Scheme, do not form part of the taxable amount when the lump sum 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) 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 Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997 , the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date. Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of the lump sum received from the Foreign Scheme should be calculated by deducting the Australian dollar equivalent of the amount vested in the Client just before the residency date from the amount vested in the Client on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt. | Detailed Reasoning - Calculation of the applicable fund earnings amount: The calculation of the applicable fund earnings for the lump sum received from the Foreign Scheme is shown in the table below with reference to the facts of the case. As discussed above, any amounts in a foreign currency are translated into Australian dollars using the exchange rate (available on our website) applicable on the day of receipt. | Detailed Reasoning - A: Value of the Client's interest in the Foreign Scheme on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Foreign Scheme | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign funds into the Foreign Scheme | 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 Scheme vested in the Client 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 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 - $$$: The result is the 'applicable fund earnings' amount in respect of the lump sum payment received by the Client from the Foreign Scheme that should be included in the Client's assessable income for the relevant income year is an amount.