Private ruling: Foreign lump sum payments
Date of advice: 7 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is tax payable when a lump sum from an overseas pension fund is transferred to a complying Australian superannuation fund? | A1: Yes

Relevant facts and circumstances: An individual (the Taxpayer) left an overseas country and arrived in Australia on a certain date (the Residency Date). After settling in Australia, the Taxpayer was employed in Australia by the same overseas employer (the Employer). As such, the Employer continued to make contributions into the overseas pension scheme until the Taxpayer moved to a new Australian contract with the Employer. The value of the Taxpayer's interest in the overseas pension scheme on the day before the Residency Date was provided The total amount of contributions made by the Employer after the Residency Date on behalf of the Taxpayer was provided. After the Employer made the final contribution to the overseas pension scheme, the stated value of benefits was provided. During the relevant income year, the entirety of the Taxpayer's benefits in the overseas pension scheme was transferred to a complying superannuation fund in Australia (the Fund) which is capable of receiving pension transfers from that overseas country. The daily exchange rate is published on the Australian Taxation Office's website. The Taxpayer no longer has any interests in the overseas pension scheme.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 subsection 305-75(3) | Income Tax Assessment Act 1997 paragraph 305-75(3)(a) | Income Tax Assessment Act 1997 paragraph 305-75(3)(b) | Income Tax Assessment Act 1997 paragraph 305-75(3)(c) | Income Tax Assessment Act 1997 section 305-80 | Income Tax Assessment Act 1997 subsection 960-50(1) | Income Tax Assessment Act 1997 subsection 960-50(4) | Income Tax Assessment Act 1997 subsection 960-50(6) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: A portion of the lump sum payment transferred from the overseas pension scheme to the Fund must be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the relevant income year. As the Taxpayer no longer has an interest in the overseas pension scheme they are eligible to make an election to have these applicable fund earnings treated as the assessable income of their Australian superannuation fund. | 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, the Taxpayer provided evidence to indicate that the overseas pension 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 the Taxpayer is assessed only on the income they earned on their benefits in the overseas pension scheme. Any amounts attributable to contributions made by or on behalf of the Taxpayer 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. 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 , 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 overseas pension 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 applicable on the day of receipt. | Detailed Reasoning - A: Value of the Taxpayer's interest in the overseas pension scheme on the day before the Residency Date | Detailed Reasoning - B: Part of the lump sum attributable to contributions to the overseas pension 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 overseas pension scheme vested in the Taxpayer 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 - $Z - ($X + $Y): The result of the calculation above is the amount of 'applicable fund earnings' in respect of the lump sum payment transferred from the overseas pension scheme that should be included in the Taxpayer's assessable income for the relevant income year. | Detailed Reasoning - Election: According to section 305-80 of the ITAA 1997, a taxpayer who is transferring their overseas superannuation benefits directly to an Australian complying superannuation fund is able to elect to have the Australian superannuation fund pay the tax on the applicable fund earnings if the taxpayer no longer has an interest in the overseas fund immediately after the payment. As the Taxpayer no longer has an interest in the overseas pension scheme, they are eligible to make the election in relation to the lump sum transfer. If an election is made, the elected amount will be assessable to the superannuation fund and subject to tax at 15% rather than being assessable to the Taxpayer and subject to tax at the Taxpayer's marginal tax rate. In order to make the election, the Taxpayer must submit the form Choice to have your Australian fund pay tax on a foreign super transfer (NAT11724) to their Australian superannuation fund. The Taxpayer may make the election up until the day they lodge their tax return for the year of the transfer (or if they do not need to lodge a tax return, the day they would have been required to lodge their tax return). This applies unless the governing rules of their Australian superannuation fund require them to make a choice earlier.

ATO view documents: 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