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Edited version of private advice

Authorisation Number: 1051787738528

Date of advice: 23 February 2022

Ruling

Subject: Foreign death benefit

Question

Is any part of the death benefit lump sum payment assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

The financial year ended 30 June 20XX

Relevant facts and circumstances

•                    The Deceased and the Taxpayer (you) became residents of Australia for income tax purposes in 20XX.

•                    The Deceased passed away in 20XX.

•                    In 20XX, the Deceased rolled X foreign retirement annuity accounts and a prudential foreign fund account into a single foreign fund (Plan A).

•                    The prudential foreign fund had allowed its members access to their benefits prior to retirement age and to place a mortgage charge over their benefits.

•                    Later in 20XX, the total benefits in Plan A were transferred into foreign fund Plan B.

•                    Plan B pays a monthly income to the holder and preserves the capital which is paid to the beneficiaries on the death of the life covered as a lump sum.

•                    Retirement annuities in Country A are governed by the Income Tax Act XX of 19XX and the Pension Funds Act No.XX 19XX. Access to the benefits in a retirement annuity is strictly legislated and is only accessible upon the legislative age of retirement of 55, death and invalidity.

•                    Members of retirement annuities are only permitted to commute one-third of the retirement benefit in cash at retirement, with the remaining two-thirds being used to purchase an annuity income.

•                    Contributions were paid by the Deceased to Plan B.

•                    In 20XX, Plan B paid out a lump sum death benefit to you and the Deceased's estate. Plan B was closed.

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 307-5(1)

Income Tax Assessment Act 1997 section 307-65

Income Tax Assessment Act 1997 section 960-50.

Income Tax Assessment Act 1997 subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 subsection 10(1)

We followed these ATO view documents

ATO Interpretative Decision ATO ID 2015/7: Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997

Reasons for decision

Foreign superannuation fund definition

Section 305-70 of the ITAA 1997 provides that where you receive a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, you include the 'applicable fund earnings' of the lump sum (if any) in your assessable income. Applicable fund earnings are worked out under section 305-75 of the ITAA 1997.

If the entity making the lump sum payment is not a foreign superannuation fund then section 305-70 of the ITAA 1997 will not have any application.

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as being a fund that is not an Australian superannuation fund. A superannuation fund has the meaning given by subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SISA), which requires that the fund is a 'provident, benefit, superannuation or retirement fund'.

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No.2) (1966) 10 AITR 290; (1966) ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

...I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefits of its employees except that it must be bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

In that case, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur:

•                    on or after retirement from gainful employment; or

•                    attaining a prescribed age; and

•                    on the member's death. (this may require the benefits being passed on to a member's dependants or legal representative).

In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SISA.

Country A retirement annuity funds are governed by the Income Tax Act XX of 19XX and the Pension Funds Act No.XX 19XX. Access to the benefits in a retirement annuity is strictly legislated and is only accessible upon the legislative age of retirement of 55, death and invalidity.

In this case, the benefits from the X retirement annuities and Plan A and Plan B cannot be accessed other than at retirement, death or incapacity and therefore meet the definition of foreign superannuation funds.

The provident fund allows an existing member to withdraw up to 100% of their benefits on the termination of employment. The termination of employment may occur prior to obtaining their retirement age of 55.

Furthermore, the provident fund allows the fund to act as a guarantor for a member's housing loan. In the advent of default, the financial institution may have recourse against a member's benefits within the fund.

The provident fund satisfies some of the requirements of a foreign superannuation fund, however the fund is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purposes of the individual's retirement. Members can withdraw benefits prior to retirement age and can place a charge over their benefits. In other words, the fund provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

Accordingly, any payments from the provident fund will not be a payment from a foreign superannuation fund and section 305-70 of the ITAA 1997 will not have any application in this instance. The payment/transfer to Plan A will instead be assessable to the Deceased member under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936). The transfer will also be classed as a member contribution to Plan A.

Death benefit - applicable fund earnings

The Deceased passed away in 20XX and their benefits from Plan B were transferred to you and the deceased estate.

Section 307-65 of the ITAA 1997 defines a superannuation lump sum as a superannuation benefit that is not a superannuation income stream benefit. Section 307-5 of the ITAA 1997 includes in the definition of a superannuation benefit a payment to a taxpayer from a superannuation fund, after another person's death, because the other person was a member of the fund.

The benefit paid by Plan B is a superannuation lump sum and it was received more than six months after you became an Australian resident. Accordingly, section 305-70 of the ITAA 1997 applies to include any AFE in your assessable income.

The AFE is the amount worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. The "you" first appearing in these subsections is the death benefit recipient. Consequently, where the death benefit recipient was an Australian resident for the whole of the period to which the lump sum relates subsection 305-75(2) of the ITAA 1997 applies, and where the death benefit recipient became a resident during that period subsection 305-75(3) applies. The period of Australian residence of the deceased fund member is not relevant.

In this case, there were a number of fund transfers. The X retirement annuity funds were established prior to you becoming an Australian resident. You were an Australian resident at all times when Plan A and Plan B were established. Accordingly, both subsections 305-75(2) and (3) of the ITAA 1997 will apply.

Subsection 305-75(3) of the ITAA 1997 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).

Subsection 305-75(2) of the ITAA 1997 states:

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).

In the situation of death benefit payments some of the references to "you" and "your" in the legislation, which literally refer to the death benefit recipient, must be interpreted as referring to the deceased fund member to avoid anomalous results in applying the methods in subsection 305-75 of the ITAA 1997. The period of Australian residence of the deceased fund member is not relevant.

As an example, for the purposes of subparagraph 305-75(3)(a)(i) of the ITAA 1997 we are concerned with the amount in the foreign fund that was vested in the Deceased at the time you became a resident. This taxes the earnings for the period you were an Australian resident. The Deceased became a member of the foreign funds before you became an Australian resident.

For the purposes of subparagraph 305-75(3)(a)(ii) of the ITAA 1997 we are concerned with the amount of contributions made by or for the benefit of the Deceased after you first became a resident.

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. 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.

For the purposes of working out the "applicable fund earnings" in relation to a superannuation lump sum under section 305-75 of the ITAA 1997, the correct rule for translating foreign currency into AUD is the rule described in Item 11A of the table in subsection 960-50(6) of the ITAA 1997. In the circumstances of this case, each amount in a foreign currency that is an element in the calculation of the Taxpayer's "applicable fund earnings" is to be translated to AUD at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Previously exempt fund earnings

Any part of the super lump sum that is transferred into another foreign super fund is exempt from tax under subsection 305-70(4) of the ITAA 1997.

The previously exempt fund earnings provisions (305-75(5) & (6) of the ITAA 1997) allow an individual to defer Australian income tax by making payments from one foreign superannuation fund to another foreign superannuation fund. Such payments can only be assessed for Australian income tax when they are eventually transferred into Australia.

Under those provisions, any amounts in the lump sum paid to Australia by a foreign superannuation fund, which had previously been transferred into that fund from a second foreign superannuation fund, are included in applicable fund earnings (ie as assessable income) to the extent that they would have been included in assessable income under subsection 305-70(2) of the ITAA 1997 if they had originally been paid to Australia instead of being transferred to the second foreign superannuation fund.

Previously exempt fund earnings - transfer: X retirement annuity funds to Plan A

The Deceased became a member of the X retirement annuity funds before you became a resident of Australia, the growth will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

Since the retirement annuities and Plan A are both foreign superannuation funds, these amounts are not assessable as per subsection 305-70(4) of the ITAA 1997. However, they will be classified as previously exempt fund earnings and hence included in the applicable fund earning calculations when you later transfer the benefits to Australia.

Item

Description

 

Amount in

(Foreign Currency)

A

Amount in Retirement Funds vested in the taxpayer on the day just before the Residency Date

XXX

B

Part of the payment attributable to contributions to the Funds during the remainder of the period

0.00

C

Part of the payment attributable to amounts transferred into the Funds from any other foreign superannuation funds during the remainder of the period

0.00

D

A + B + C

(The step outlined in paragraph 305-75(3)(a) of the ITAA 1997)

XXX

E

Amount in Retirement Funds vested in the taxpayer when the lump sum was transferred to Plan A

XXX

F

E - D

(The step outlined in paragraph 305-75(3)(b) of the ITAA 1997)

XXX

G

The proportion of the total days during the period of which the Client was an Australian resident for tax purposes.

1

H

Previously exempt fund earnings (if any)

0.00

I

F x G + H = Applicable Fund Earnings (as future previously exempt fund earnings)

(The steps outlined in paragraphs 305-75(3)(c) and 305-75(3)(d) of the ITAA 1997)

XXX

Transfer from Plan A to Plan B

1.            As the Deceased became a member of Plan A after you became a resident of Australia, the growth in the fund will be worked out in accordance with subsection 305-75(2) of the ITAA 1997.

Item

Description

 

Amount in

(Foreign Currency)

A

Part of the lump sum attributable to contributions to the Fund

XXX

B

Part of the lump sum attributable to amounts transferred from foreign super funds into the Fund

XXX

C

A + B

XXX

D

Amount in Plan A vested in the Taxpayer when the lump sum was transferred to Plan B in 20XX

XXX

E

D - C

(XXX)

F

All previously exempt fund earnings (if any)

XXX

G

E + F = Applicable Fund Earnings (as future previously exempt fund earnings)

XXX

Transfer from Plan B into Australia

As the Deceased became a member of Plan B after you became a resident of Australia, the growth in the fund will be worked out in accordance with subsection 305-75(2) of the ITAA 1997.

You also have an amount of previously exempt fund earnings in respect of the lump sum paid to Plan B. The previously exempt fund earnings attributable to this lump sum represent the amount that would have been included in your assessable income if you had personally been paid the lump sum when it was transferred from Plan A to Plan B.

The calculation of the applicable fund earnings for the lump sum received from Plan B is shown in the table below with reference to the facts of the case. Any amounts in foreign currency are translated into Australian dollars using the exchange rate applicable on the day of receipt. In this case it is A$1 = Foreign Currency X.

Item

Description

 

Amount in (Foreign Currency)

Amount in (A$)

A

Part of the lump sum attributable to contributions to Plan B

xxx

B

Part of the lump sum attributable to amounts transferred from foreign funds into Plan B

xxx

C

A + B

xxx

 

D

Amount of lump sum in Plan B vested in the Taxpayer when the lump sum was transferred to Australia in 2019

xxx

xxx

E

D - C

Subsection 305-75(2)(b) of the ITAA 1997

(xxx)

F

All previously exempt fund earnings in respect of the lump sum

xxx

G

Applicable Fund Earnings attributable to the lump sum payment E + F

xxx

xxx

2.            Therefore the 'applicable fund earnings' amount in respect of the lump sum amount transferred from Plan B for the 20XX-XX income year is $X.