You have to pay income tax on the applicable fund earnings component of a foreign fund transfer.
Applicable fund earnings
Broadly, the applicable fund earnings are the earnings on your foreign super interest which have accrued since you became a resident of Australia.
How the applicable fund earnings are calculated depends on whether you were an Australian resident at all times during the period to which the lump sum relates. The way to calculate your applicable fund earnings is set out at section 305-75 of the Income Tax Assessment Act 1997.
You can request a private ruling to determine how much of a transfer is applicable fund earnings.
The six-month rule
None of your foreign super interest is treated as applicable fund earnings if you transfer it to Australia within six months of:
- becoming a resident of Australia, or
- your foreign employment terminating.
Leonard grew up overseas and contributed to a super scheme under the rules of that country. He emigrated to Australia and became an Australian resident in September 2008. At that time, his super interest was the equivalent of A$300,000.
In May 2009, Leonard decided to transfer the balance from his foreign super fund to his Australian super fund. The value of his super interest was then $400,000, so his applicable fund earnings were $100,000. He is required to declare this amount in his tax return (or he may be able to include the amount in his fund’s assessable income, see Including applicable fund earnings in your fund’s assessable income).
End of example
Cameron worked overseas for two and a half years and accrued the equivalent of A$25,000 in his foreign super fund. He returned to Australia in July and arranged for the transfer of his foreign super interest in October.
The amount transferred was A$27,000, which included $2,000 he earned after he became an Australian resident. However, because Cameron transferred the amount within six months of becoming an Australian resident, none of the amount is treated as applicable fund earnings.
End of example
Including amounts in your fund’s assessable income
You may be able to make an election to include some of your applicable fund earnings in your fund’s assessable income. This will mean that your fund will pay the tax on the amount of your applicable fund earnings you elect, instead of you. Your fund pays income tax at 15% which may be less than the rate of tax that you pay.
There are conditions to be met before you can make the election. You must:
- have been resident in Australia for more than six months or have terminated your employment more than six months ago
- transfer the whole of the foreign fund interest directly to a complying Australian super fund.
If you do not meet the conditions you must still include any applicable fund earnings in your personal assessable income but you cannot elect to include any of the amount in your fund’s assessable income.
Your election must be made in the approved form, Choice to have your Australian fund pay tax on a foreign super transfer.
Tony transfers $160,000 from his foreign super fund to his Australian super fund. The transfer is the whole of his interest in his foreign fund. The applicable fund earnings amount is $40,000. If Tony makes no election he must include the $40,000 in his personal assessable income for the year (taxed at his marginal tax rates).
If Tony elects to include $30,000 of the applicable fund earnings into his fund’s assessable income, his fund will include $30,000 in its assessable income (taxed at 15%) and Tony must include $10,000 in his personal assessable income for the year (taxed at his marginal tax rates).
If Tony elects to include $40,000 of the applicable fund earnings into his fund’s assessable income for the year, his fund will include $40,000 in its assessable income (taxed at 15%) and Tony will not have to include any of the amount in his personal assessable income for the year.
End of example
If you do not elect to include the amount in your fund’s assessable income, the applicable fund earnings are personally assessable to you and you will need to include this amount in your tax return.
Excess contributions tax
When you transfer an amount from your foreign super fund to your Australian super fund, your fund will report the transfer as a contribution for you for the year.
We use the contributions your fund reports to work out your concessional and non-concessional contributions for the year.
How your fund reports a foreign fund transfer
Your fund must include the transfer in the contributions it reports for you.
Your fund will report the transfer at one or more of the following labels:
If you elect to include some of your applicable fund earnings in your fund’s assessable income, the amount you elect will not be reported at either of these labels. It will be reported as part of your total contributions.
Non-assessable foreign fund amount
Generally, most of a transfer from a foreign fund will consist of an amount which the fund does not include in its assessable income (unless you make an election). This amount will generally consist of contributions you have made to the foreign fund and the earnings on those contributions.
The non-assessable amount is the amount of the transfer which was ‘vested’ in you at the time of the transfer. Vested means that you were entitled to it – it had to be paid to you at law if you met any other necessary conditions.
Fund earnings will generally have been vested in you at the time of the transfer even if they weren't allocated to your account until the time of the transfer.
The non-assessable foreign fund amount your fund reports will include any applicable fund earnings unless you have made an election to include all or part of the applicable fund earnings in your fund’s assessable income.
If you elect to include some or all of your applicable fund earnings in the assessable income of your fund, your fund will not report at this label the amount you elect, even though it is now included in the fund’s assessable income. The amount is no longer treated as a contribution but treated like normal earnings of your fund.
The amount reported at the Non-assessable foreign fund amount label is counted towards your non-concessional contributions.
Assessable foreign fund amount
Any amount of a foreign fund transfer that exceeds the amount that was vested in you at the time of transfer is included in the assessable income of the fund.
The amount reported at the Assessable foreign fund amount label is counted towards your concessional contributions.
When John arranged for a transfer from his foreign super fund to his Australian super fund, his account balance was A$300,000. However, his foreign employer allocated an additional $75,000 to John as a discretionary payment in recognition of his years of service. The additional $75,000 is the assessable component of the total transfer amount of $375,000.
When Guy arranged for a transfer from his foreign fund to his Australian super fund, his account balance was $200,000. However, as part of finalising Guy’s account, his foreign fund credited $15,000 in earnings to his balance.
Normally, this would not have been done until the end of the calendar year. However, under the rules of the foreign fund, earnings must be credited to an account prior to its closure.
In this example, the earnings were vested in Guy, even though they would not have been credited to his account until later in the year if he had not requested the transfer.
End of example