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 has been recently published. It appears to overturn a long established approach on how tax is paid on QROPS transfers.
The issue in the Interpretative Decision is "What is the correct rule for translating foreign currency into Australian dollars (AUD) for the purposes of working out an individual's 'applicable fund earnings' in relation to a superannuation lump sum under section 305-75 of the Income Tax Assessment Act 1997 (ITAA1997) when an individual receives a superannuation lump sum from a foreign superannuation fund to which section 305-70 of the ITAA1997 applies." Turning that into English, the question is for individuals who receive a transfer more than six month after becoming an Australian tax resident, how do you translate the growth since residency in the entitlement transferred into Australian dollars?
Australians are taxed on their world wide income. If they have an overseas unhedged investment the taxable gain could consist of any investment earnings plus/minus currency gains/losses. What ATO ID 2015/7 is seeking to impose is to ignore currency gains/losses. This is an increase the aggregate tax take. While currently the A$ has declined against the British pound, many of these transfers are still worth less now than when the person first moved to Australia. Ten years ago the A$ may have been worth 40p (ie A$2.50 per GBP1) versus say 50p now (ie $2.00 per GBP1). When an individual is getting less now than they could have received when they first became a tax resident, I don't think they are going to see it as logical or indeed fair for the taxman to change the rules to want to be paid tax on the reduction in their overseas investment. Currently there will be a few cases where there has been a currency gain - they will be happy - and some that fall between the two extremes.
This is how the issue used to be included in Private Binding Rulings for foreign currency conversion (eg ruling 1012738539229):
"Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars. Together with the application of subsection 960-50(4) this has the result that the payment you received is translated into Australian dollars at the exchange rate applicable at the time of receipt. Similarly, the amount vested in you on the day before you became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day." I have added the bolding.
In the new Interpretative Decision the ATO note that "Item 11A requires that an amount to which it applies is to translated into Australian currency at an exchange rate that is reasonable having regard to the circumstances. The Commissioner considers that, in the circumstances of this case, the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsection 305-75(2) and (3) on the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum ... ". The example shows the same date of receipt exchange rate used for both receipt date and earlier residency date ie the AUD rate for the day of receipt.
I fail to see how an investment that is worth less than it was at the date the person came into the Australian tax system should have tax to pay on the transfer. I hope people in this situation will seek an answer via private binding tax rulings.
The NetActuary Team