Private ruling: Lump sum payment from a foreign superannuation fund
Date of advice: 11 December 2018
Published: April 2019
Ruling period: Income year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is any part of the lump sum received by the Taxpayer from a foreign superannuation fund (the Foreign Fund) 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 from overseas and became a resident of Australia for taxation purposes more than 10 years ago. While living overseas, the Taxpayer became a member of the Foreign Fund. A pension is usually payable from the Foreign Fund from the age of 55 years. There have been no contributions or transfers into the Foreign Fund since the Taxpayer became a resident of Australia for tax purposes. In the 2017-18 income year, the Taxpayer received a lump sum payment from the Foreign Fund into their Australian bank account (the Payment). The Australian bank used the exchange rate published on the ATO website.

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 part of the Payment that the Taxpayer received from the Foreign Fund should be included in the Taxpayer’s assessable income for the 2017-18 income year as the applicable fund earnings amount of the payment. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: The tax treatment of lump sums received from certain foreign superannuation funds is set out in Subdivision 305-B of the ITAA 1997. 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 Fund is considered to be a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997. In this instance, as the Taxpayer received the Payment more than six months after their residency date, 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 Taxpayer’s assessable income for the 2017-18 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 Taxpayer became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings 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 period to which the lump sum relates (but before you received it) 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 remainder of the period; (b) subtract that total 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 Taxpayer is assessed only on the income they earned on their benefits in the Foreign Fund during the residency period. Earnings made during periods of non-residency, and contributions and transfers into the Foreign Fund, 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 (ATO ID 2015/7), 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 Fund should be calculated by deducting the Australian dollar equivalent of the amount vested in the Taxpayer just before the residency date from the amount vested in the Taxpayer on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt. | Detailed Reasoning - Calculation of applicable fund earnings amount: The calculation of the applicable fund earnings amount in respect of the lump sum received by the Taxpayer from the Foreign Fund is shown in the example below. As discussed, any amounts in the foreign currency are translated into Australian dollars using the exchange rate applicable on the day of receipt. | Detailed Reasoning - A: The value of the Taxpayer’s interest in Foreign Fund on the day before residency 15,000 | Detailed Reasoning - B: Part of the lump sum attributable to contributions into the Foreign Fund 0 | Detailed Reasoning - C: Part of the lump sum attributable to amounts transferred from other foreign funds 0.00 | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) An amount | Detailed Reasoning - E: Amount in the Foreign Fund vested in the Taxpayer when the lump sum was paid 50,000 | 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 1 | Detailed Reasoning - H: Previously exempt fund earnings (if any) 0.00 | 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 - 60,000: Therefore, using this example, the applicable fund earnings amount in respect of the Payment received by the Taxpayer from the Foreign Fund that should be included in the Taxpayer’s assessable income for the 2017-18 income year is $60,000 .