Edited version of private advice

Authorisation Number: 1051999576123

Date of advice: 14 July 2022

Ruling

Subject: Foreign fund transfer

Question

Will any part of the lump sum benefit payment be 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:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

•                     You ceased employment with a Country A company in 19XX.

•                     You became a resident of Australia for income tax purposes in 19XX.

•                     You were a member of Fund A prior to becoming an Australian resident.

•                     Fund A has provided the value of your deferred pension in 19XX and the annual value of the equivalent pension income in 20XX.

•                     In 20XX you transferred your total benefits from Fund A to Fund B.

•                     Both Fund A and Fund B are Country A registered superannuation schemes. Benefits cannot be accessed before 55 unless under exceptional circumstances such as ill health or death.

•                     You departed Australia for overseas employment and ceased to be an Australian tax resident for a time during the relevant period.

Assumptions

1.    You intend to transfer benefits from Fund B to an Australian superannuation fund during the 20XX year of income.

2.    You do not know the value of the lump sum at residency date in Fund A. You will estimate the lump sum valuation based on the growth value ratio of the deferred pension during this period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Section 305-80

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

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

Superannuation Industry (Supervision) Act 1993 Subsection 62

Other relevant 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

When a person receives a lump sum from a foreign superannuation fund more than six months after they became an Australian resident, the growth they earned on their foreign superannuation during the period when they were a resident of Australia is included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997.

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'.

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).

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.

In this case, the benefits from your Fund's A and B cannot be accessed other than at retirement, death or incapacity and therefore meet the definition of a foreign superannuation fund.

Applicable fund earnings

When a person receives a lump sum from a foreign superannuation fund more than six months after they became an Australian resident, the growth they earned on their foreign superannuation during the period when they were a resident of Australia is included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997.

The applicable fund earnings amount is worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

Subsection 305-75(3) of the ITAA 1997 states, if you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earningsis 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 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 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).

The effect of section 305-75 of the ITAA 1997 is that only the income earned in respect of the foreign superannuation fund since Australian residency, less any contributions made in that period, is assessed. Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the lump sum is paid.

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 (i.e. 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.

You became a resident of Australia for tax purposes in 19XX. During 20XX you transferred your total benefits in Fund A to Fund B. Subsequently, there will be a calculation of previously exempt fund earnings that will be included in the applicable fund earnings calculation when you eventually transfer your foreign lump sum payment to Australia. You have provided a valuation of the lump sum amount at residency date, which is an acceptable method in this case.

Foreign currency conversion

The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in 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 (ATO ID 2015/7). The Commissioner determined that the exchange rate at which it is reasonable to translate amounts into Australian currency for the purposes of section 305-75 of the ITAA 1997, is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. This will be the time when you transfer your benefits from Fund B to Australia.

Proportion of residency days

Paragraph 305-75(3)(c) of the ITAA 1997 requires the applicable fund earning calculation to take into consideration the proportion of the total days during the period when the taxpayer was an Australian resident. The period commences on the date (relating to the lump sum) on which the member first became an Australian resident and ceases when the foreign superannuation lump sum is paid.

In this case, you became an Australian resident in 19XX and the lump sum was paid from Fund A to Fund B during 20XX, which is XXX days. You were a non-resident for a time during this period, which is XXX days. The number of days that you were a resident in the relevant period is XXX days. The portion of resident days is XXX.

Applicable fund earning election

You may choose to pay the lump sum into a complying superannuation fund. You can choose to have all or part of your applicable fund earnings included in the assessable income of your superannuation fund. If you do, then the amount of the super lump sum that you will include in your personal assessable income is the applicable fund earnings reduced by the amount of the applicable fund earnings you have chosen to be assessed in the fund.

The choice can only be made if the following conditions are satisfied:

•                     the person is taken to have received the lump sum under section 307-15 of the ITAA 1997 for their benefit or at their direction

•                     the whole of the lump sum is paid directly from the foreign superannuation fund into a complying superannuation fund; and

•                     the person no longer has an interest in the foreign superannuation fund immediately after the lump sum is paid.

Your concessional contributions exclude applicable fund earnings that are included in the fund's assessable income due to an election made under section 305-80 of the ITAA 1997.

Any amount of the lump sum transfer that is not included in the fund's assessable income as applicable fund earnings will be a non-concessional contribution.

You must make your election on the approved form.

Previously exempt fund earnings - transfer: Fund A to Fund B

As you became a member of the Fund A 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 Fund A and Fund B 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 according to subsections 305-75(5) and 305-75(6) of the ITAA 1997 and hence included in the applicable fund earning calculations when you later transfer the benefits from Fund B to Australia.

Transfer from Fund B into Australia

As you became a member of Fund 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. However, as stated above this will not occur until your benefits are transferred from Fund B to Australia.

You will have an amount of previously exempt fund earnings in respect of the lump sum paid to Fund B during 20XX. 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 the Fund A to Fund B.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).