Private ruling: Lump sum payment from a foreign fund
Date of advice: 10 September 2021
Published: November 2021
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of the lump sum payment received from the foreign pension 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 taxpayer migrated to Australia in the 20XX-XX income year and has been an Australian resident for taxation purposes since that date. The taxpayer has an interest in a foreign fund. The taxpayer provided the value of their interest in the foreign fund as at the date of their Australian residency. There have been no contributions into the foreign fund since the taxpayer became an Australian resident for taxation purposes. There have been no transfers into the foreign fund since the taxpayer became an Australian resident for taxation purposes. The taxpayer could not access their benefits in the foreign fund other than at retirement. In the 20XX-XX income year the taxpayer received a lump sum payment from the foreign fund, which was paid into their Australian bank account.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Section 305-75 | Income Tax Assessment Act 1997 Subsection 305-75(3)

Reasons for decision: Summary: A portion of the lump sum payment the taxpayer received from the foreign fund must be included as 'applicable fund earnings' in their income tax return for the 2019-20 income year. The assessable applicable fund earnings is calculated as $X. | Detailed Reasoning - Detailed reasoning: If the taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, their assessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while they were an Australian resident. In this case, the foreign fund is a foreign superannuation fund. The taxpayer became an Australian resident after the start of the period to which the lump sum relates. They remained an Australian resident at all times until the lump sum was paid. Therefore, the applicable fund earnings is calculated in accordance with subsection 305-75(3) of the ITAA 1997. The effect of section 305-75 of the ITAA 1997 is that they are 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. The applicable fund earnings amount is subject to tax at the taxpayer's marginal tax rate. The remainder of the lump sum is not assessable income and not exempt income. The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained 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 . We use the exchange rate that applied when the taxpayer 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.

This ruling applies for the following period: