Private ruling: Lump sum payment received from a foreign superannuation fund
Date of advice: 18 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is any part of the lump sum payment from a foreign pension scheme (Plan) assessable income under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) ? | A1: Yes

Relevant facts and circumstances: You became an Australian tax resident in the 200X financial year. You were a member of the Plan which is a foreign registered pension scheme. The Plan only allows access due to retirement or death. At the date of leaving service with a previous employer you had an entitlement to a deferred annual pension in the Plan. The deferred annual pension is indexed. No contributions or transfers were made into the Plan after you became an Australian resident. The transfer value of your interest in the Plan at a date in the 20XX financial year was a certain amount and was guaranteed for specified number of months. You transferred your entire interest in the Plan into a complying superannuation fund (Fund) in the 20XX financial year. Assumption The amount in the Plan vested in you just before you became an Australian resident (the start day) was a certain amount.

Relevant legislative provisions: 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 307-15 | Income Tax Assessment Act 1997 section 960-50

Reasons for decision: Summary: A portion of the lump sum transferred from the Plan is applicable fund earnings. | Detailed Reasoning - Lump sum payments received from foreign superannuation funds: A lump sum payment a person receives from a foreign superannuation fund more than six months after they become an Australian resident may include an amount of applicable fund earnings (AFE). The AFE is taken into account in determining the amount to include in a person assessable income under section 307-70 of the ITAA 1997. Based on the information provided the Commissioner accepts the Plan is a foreign superannuation fund. The payment was received by the Fund more than six months after you became an Australian resident. The payment is treated as being received by you because it was made to the Fund at your direction or request (section 307-15 of the ITAA 1997). Therefore, section 307-70 applies in respect of the payment. | Detailed Reasoning - Applicable Fund Earnings: As you became a resident of Australia after the start of the period to which the lump sum relates, the AFE are worked out under subsection 305-75(3) of the ITAA 1997. Subsection 305-75(3) 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; add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6) | Detailed Reasoning - Foreign currency conversion: Subsection 960-50(1) states that an amount in a foreign currency is to be translated into Australian dollars. 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 the circumstances of this case, the Commissioner considers that each amount in a foreign currency that is an element in the calculation of the AFE is to be translated to Australian Dollars at the exchange rate applicable at the time of receipt of the lump sum. Therefore, for the purposes of section 305-70 of the ITAA 1997, the AFE amount in respect of the lump sum received from the Plan should be calculated by deducting the Australian dollar equivalent of the amount vested in you just before the Residency Date from the amount vested in you on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt. | Detailed Reasoning - Calculation: The calculation of AFE for the lump sum received from the Plan is shown in the table below with reference to the facts of the case. As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt. We have used the rate which was applied to the transfer into the Fund’s bank account. | Detailed Reasoning - A: Value of your interest in the Plan on the day before residency | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the Plan | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from foreign superannuation funds into the Plan | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) | Detailed Reasoning - E: Amount in the Plan 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 X XXXX 199X to X XXXX 201X 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) Your AFE in accordance with subsection 305-75(3) of the ITAA 1997 in respect of the transfer from the Plan is $amount ). | Detailed Reasoning - Choice – lump sum paid into complying superannuation fund: As all of the lump sum was paid into a complying superannuation fund and you no longer have an interest in the Plan you are able to choose to have all or part of your AFE included in the assessable income of the Fund (section 305-80 of the ITAA 1997). If you choose to do this, the Fund will pay tax on the AFE at a concessional rate of 15%, instead of you paying tax at your marginal rate. Your choice needs to be in writing in the approved form. You can find the form on our website www.ato.gov.au and searching for QC 19311.