It has become common for Australians to pursue employment overseas for a period of time during their working life. Daniel Butler examines the rules determining how they can bring their superannuation accumulated offshore back home with them.
This article provides a brief overview of the main rules on transferring lump sum amounts from foreign superannuation funds (FSF) to an Australian resident or to an Australian superannuation fund in respect of an Australian resident.
Background
Broadly, an Australian resident taxpayer is assessable on the applicable fund earnings (AFE) in respect of payments and transfers from FSFs where that person has been a resident of Australia for more than six months as per section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997).However, to the extent that person transfers the lump sum from an FSF to a complying Australian superannuation fund, the AFE is generally excluded from that person’s assessable income as per sections 295-200 and 305-80 of the ITAA 1997.
Example of an FSF transfer to an Australian SMSF
Liam has an SMSF that is a regulated Australian superannuation fund that is also a resident and complying superannuation fund. He is considering transferring $540,000 from his overseas superannuation fund to his Australian SMSF. After he became a resident of Australia:
- no contributions were made by Liam to his overseas fund,
- there have been no amounts transferred to Liam’s overseas fund from any other FSF, and
- no payments or transfers were made in respect of Liam to or from any other FSFs.
Assume Liam’s membership period for his overseas fund was six years before he became an Australian resident and four years post. Also assume Liam had $440,000 in the overseas fund when he became an Australian resident.
Liam’s analysis
Liam must include the amount of any superannuation lump sum that relates to his AFE under section 305-70(3) of the ITAA 1997 in his assessable income for the year of receipt, if he:
- received his superannuation lump sum from an FSF more than six months after becoming an Australian resident for tax purposes, and
- reduced the AFE amount that he chooses to be assessed in an Australian superannuation fund as permitted under section 305-80 of the ITAA 1997. As noted in the note under section 305-70(2) of the ITAA 1997: “Under section 305-80, if your lump sum is paid into a complying superannuation plan, you can choose to have some or all of the applicable fund earnings excluded from your assessable income. The amount you choose is included in the assessable income of the plan: see section 295- 200.”
Thus Liam must include AFE in either his personal Australian assessable income or in the income of his chosen complying Australian super fund if he exercises a choice under section 305-80 of the ITAA 1997.
Australian resident criteria
Under section 305-70(1) of the ITAA 1997Under section 305-70(1) of the ITAA 1997, we note Liam must be an Australian resident when he receives the lump sum. An Australian resident is defined in section 995-1 of the ITAA 1997 to mean a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). Section 6 of the ITAA 1936 defines a ‘resident or resident of Australia’ to mean:
a. a person, other than a company, who resides in Australia and includes a person:
i. whose domicile is in Australia, unless the commissioner is satisfied that the person’s permanent place of abode is outside Australia,
ii. who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the commissioner is satisfied the person’s usual place of abode is outside Australia and the person does not intend to take up residence in Australia.
Applicable fund earnings
Broadly, AFE refers to the earnings on Liam’s overseas fund interest that have accrued (having regard to the method in section 305-75 of the ITAA 1997 below) since he became a resident of Australia. There are numerous private binding rulings (PBR) dealing with the application of division 305 and they broadly describe its intention as: “The result of this calculation is that a person will be assessed only on the income earned in the fund whilst that person is a resident of Australia. That is, they will only be assessed on the accretion to the fund since they became a resident of Australia.”However, section 305-75 of the ITAA 1997 sets out the method for calculating AFE and has numerous rules that must be carefully followed to determine the assessable amount. We extract section 305-75 below.
1. This section applies if you need to work out an amount (your applicable fund earnings) in relation to a superannuation lump sum to which section 305-70 applies that you receive from a foreign superannuation fund.
If you were an Australian resident at all times
2. If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);
ii. the part of the lump sum (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 income tax);
c. add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6).
If you were not an Australian resident at all times
3. If you become an Australian resident after the start of the 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 from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign income 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).
We will now analyse the application of section 305-75 as follows:
An amount received by Liam from the overseas fund or rolled over to an Australian SMSF would be covered by section 305-75(1) of the ITAA 1997.
The method under section 305-75(3) is applicable to the $540,000 transfer as Liam has been an Australian resident for four years of the 10-year period to which the lump sum from that overseas fund relates. Applying the method in section 305-75(3) to Liam’s facts, the following AFE arises (with references to the relevant part of section 305-75(3)):
• (3)(a)(i) – $440,000 was vested in Liam just before he became an Australian resident,
• (3)(a)(ii) – no contributions have been made to the overseas fund since Liam became an Australian resident,
• (3)(a)(iii) – no FSF transfers have been made to the overseas fund since Liam became an Australian resident,
• (3)(b) – subtract $440,000 from the $540,000 when the lump sum is paid, resulting in a net $100,000,
• (3)(c) – multiply the resulting amount of $100,000 by the proportion of the total days during the period when you were an Australian resident (assume 40 per cent, that is, four years divided by 10 years), or $100,000 x 40%,
• (3)(d) – add previously exempt fund earnings – nil.
Thus, Liam’s AFE is $40,000, ignoring foreign exchange (FX) translations (discussed below).
Note Liam has the option of applying for a PBR where the ATO calculates the amount of AFE. There are numerous PBRs where certain assumptions were required to be made and a PBR was requested to provide greater certainty on the outcome. This might be an option for Liam to reduce risk and uncertainty.
Election to include AFE in an SMSF’s assessable income
Liam will need to plan ahead to be in a position to elect to have some or all of the $40,000 amount of AFE included in his SMSF’s assessable income. He would be able to make an election to include some of his AFE in his SMSF’s assessable income under section 305-80 if the following conditions are satisfied. An extract of section 305-80 follows:
1. This section applies if:
a. section 305-70 applies to a superannuation lump sum that is paid from a foreign superannuation fund; and
b. you are taken to receive the lump sum under section 307-15; and
c. all of the lump sum is paid into a complying superannuation fund; and
d. immediately after the lump sum is paid into the complying superannuation fund, you no longer have a superannuation interest in the foreign superannuation fund.
2. You may choose for all or part of your applicable fund earnings worked out under section 305-75 (but not exceeding the amount of the lump sum) to be included in the assessable income of the complying superannuation plan.
Note: section 295-200 provides for the amount specified in the choice to be included in the assessable income of the complying superannuation plan.
3. Your choice:
a. must be in writing; and
b. must comply with the requirements (if any) specified in the regulations.
Applying Liam’s facts to the criteria in section 305-80, we note:
• Paragraph (1)(c) requires there is no interest left in the FSF after the lump sum is transferred from the overseas fund into Liam’s SMSF.
• The amount of AFE in respect of any such transfer from the overseas fund to Liam’s SMSF would be assessable income to his SMSF and would therefore be subject to the usual 15 per cent tax payable by an SMSF trustee.
Should Liam elect to include AFE in his SMSF under section 305-80?
There are a number of factors that relate to this decision. These include:• As discussed above, the relevant overseas fund must be cleared out and have a nil balance after the transfer to Liam’s SMSF. The AFE in relation to the transfer from the overseas fund would be assessable income of the SMSF.
- Liam would be taxed at his marginal tax rate plus applicable levies (that is a maximum total of 49 per cent) on any AFE that is assessable to him personally in the absence of making a choice under section 305-80. Thus Liam may prefer to have the tax rate capped at the usual 15 per cent fund tax rate.
- The amount that can be transferred from Liams overseas fund to his Australian SMSF is limited by the available capacity of Liam’s contribution caps as discussed below.
Transfers from an overseas fund to an Australian fund are subject to the contribution caps
A concessional contribution (CC) is defined in section 291-25. The relevant extract from section 291-25 follows:
1. A contribution is covered under this subsection if:
a. it is made in the financial year to a complying superannuation plan in respect of you; and
b. it is included in the assessable income of the superannuation provider in relation to the plan … ;and
c. it is not any of the following:
i. an amount mentioned in subsection 295-200(2).
Section 295-200 relevantly provides:
1. The assessable income of a fund that is an Australian superannuation fund for the income year includes an amount transferred to the fund from a fund that was a foreign superannuation fund for the income year in relation to a member of the foreign fund to the extent that the amount transferred exceeds amounts vested in the member at the time of the transfer.
2. The assessable income of a fund that is a complying superannuation fund for the income year includes so much of an amount transferred to the fund from a fund that was a foreign superannuation fund for the income year as is specified in a choice made by a former member of the foreign fund under section 305-80.
3. The amount is included in the income year in which the transfer happens.
Thus, to the extent an amount transferred from the overseas fund represents AFE, that is, $40,000, that amount would not be counted as a CC against Liam’s concessional CC due to the amount being excluded from the CC cap under section 291-25(2(c)(i).
Non-concessional contribution cap
As discussed above, section 305-70 broadly includes so much of a taxpayer’s AFE in their assessable income to the extent that they do not make a choice under section 305-80. Section 305-70(3) provides:
3. The remainder of the lump sum is not assessable income and is not exempt income.
Broadly, a lump sum amount transferred is assessable to the extent of the AFE (that is, $40,000) and the balance is not assessable. If an election under section 305-80 is exercised, the $500,000 balance is treated as a non-concessional contribution (NCC).
We now analyse what constitutes an NCC under section 292-90.
2. A contribution is covered under this subsection if:
a. it is made in the financial year to a complying superannuation plan in respect of you; and
b. it is not included in the assessable income of the superannuation provider in relation to the superannuation plan …; and
c. it is not any of the following:
i. a government co-contribution.
Therefore, we conclude to the extent a transfer from the overseas fund does not reflect AFE (which is included in a fund’s assessable income), the amount will generally constitute an NCC. This is because, under section 305-70(3) the amount is not assessable income and therefore paragraphs (a) and (b) of section 292-90(2) are satisfied and no relevant exception applies under paragraph (c). Thus, we conclude the non-assessable amount is an NCC. This means Liam would need to be careful on the amount he transfers to his Australian SMSF as the usual contribution caps apply, apart from the amount of AFE that is covered by a choice under section 305-80. Since Liam is under 65, he may be in a position to transfer the entire $540,000 to his SMSF from his overseas fund under regulation 7.04 of the Superannuation Industry (Supervision) Regulations 1994 and section 292-85(3) of the ITAA 1997, if he has not previously invoked the bring-forward provision in relation to his NCC cap. However, Liam should still be careful to manage any FX fluctuations that may impact on his caps. It appears Liam will only use up $500,000 of his NCC limit in respect of the above transfer.
What FX rate is used for converting AFE?
The AFE itself is not converted from FX into Australia dollars due to the method of calculating it, which requires reference to the ‘elements in the calculation of other amounts’ (section 960-50(4)). These prior elements must be calculated first. That is, each of:
- the value of the overseas fund when it was transferred into Australia, and
- the value of the overseas fund when Liam became an Australian resident.
These two elements are then both converted into Australian dollars at the time a payment from the FSF is received, according to the commissioner in ATO Interpretive Decision 2015/7. The commissioner’s view here was a change to his practice reflected in numerous prior PBRs and is not accepted as being correct by some industry advisers.
Amount of foreign income tax offset – Liam?
A foreign income tax offset (FITO) may be available to Liam in respect of any AFE that is assessable to him personally. He may be entitled to claim a tax offset for any foreign tax he has paid on any part of the lump sum that he receives that is included in his Australian assessable income. To be entitled to a FITO under section 770-10:
- Liam must have actually paid, or be deemed to have paid, an amount of foreign income tax,
- the income or gain on which Liam paid foreign income tax must be included in Liam’s assessable income for Australian income tax purposes.
However, the amount of the offset is also proportionate to the extent of his Australian income on which tax is paid. Section 770-10 provides:
1. You are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.
Note 2: If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)).
Accordingly, only a proportion of the full foreign tax paid may count as an offset if only part of the lump sum from the overseas fund is assessable income. Given Liam has elected for his AFE to be assessable to his SMSF, he is not entitled to any FITO.
However, assuming he did not elect for the AFE to be assessable to his SMSF, then a proportionate FITO may have been available to Liam. His FITO claim would then broadly reflect the extent that the AFE is assessable income as a proportion of the total amount transferred. As discussed above, only part of a transfer may be assessable as AFE and the balance is generally exempt.
As a non-refundable tax offset, any amount of FITO would only reduce Liam’s income tax payable (including Medicare levy). Under the tax offset ordering rules, the FITO is applied after all other non-refundable tax and non-transferable offsets. Once Liam’s tax payable has been reduced to nil, any unused FITO is not refunded to Liam, nor can it be carried forward to later income years.
Conclusion
Our world is becoming increasingly globalised and advisers need to be aware of the complexities that may arise in dealing with the above types of queries. The above example was relatively straightforward and typically the issues arising in real life require expert assistance. Unfortunately, the legislation and ATO guidance in this area are far from clear.
