Edited version of private advice

Authorisation Number:1052106788865

Date of advice: 3 May 2023

Ruling

Subject:Foreign fund transfers

Question 1

Will an interim and final payment from Country A be taxed in Australia as lump sum payments pursuant to section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the applicable fund earnings on the interim payment from the Fund, nil?

Answer

Yes

Question 3

Is the starting value for the potential next lump sum payment worked out under subparagraph 305-75(3)(a)(i) and subsection 305-75(4) of the ITAA 1997?

Answer

Yes

Relevant facts and circumstances

You became a resident of Australia for tax purposes in the 20XX-XX income year.

You became a member of your Country A Fund prior to becoming a resident.

The Country A Fund is a registered pension scheme.

The interim withdrawal from the Country A Fund was made directly to you as a lump sum.

You are considering transferring the entire benefit in your Country A Fund to Australia, with the option of transferring the benefit to an Australian superannuation fund.

There have been no contributions made to the Fund since residency date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

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

Applicable fund earnings

When a person receives a lump sum from a foreign superannuation fund more than 6 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.

In this case, the fund to which the lump sum relates, was established before you became an Australian resident. As you were not an Australian resident at all times during the period, subsection 305-75(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 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).

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.

An amount of applicable fund earnings may also include amounts of previously exempt fund earnings which occur where an amount in a foreign super fund is transferred to another foreign super fund before being received in Australia. These earnings would not otherwise be included and are set aside until the lump sum is transferred to you, or your complying Australian super fund.

Subsection 305-75(4) of the ITAA 1997 is relevant for calculating the applicable fund earnings where multiple lump sums have been paid to you from the same foreign fund:

If the lump sum is not the first lump sum from the fund you have received to which this section applies, for subsections (2) and (3) the start day is the day after you received the most recent such lump sum.

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 to Australia.

Interim transfer

As you became a member of the Country A Fund before you became a resident of Australia, the growth will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = £pound;X.

The 'applicable fund earnings' amount in respect of the £pound;X lump sum payment transferred from the Fund is -£pound;X.

However, as stated in subsection 305-75(3) of the ITAA 1997 your applicable fund earnings cannot be less than zero.

In this instance, the amount included as assessable income for the lump sum payment is nil, based on the decreased value of the benefit from the date of residency. Accordingly, there will be no amount to include in your assessable income for the 20XX-XX income year.

Future transfer

As you became a member of the Country A Fund before you became a resident of Australia, the growth will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

The starting value will need to be determined as per subparagraph 305-75(3)(a)(i) and subsection 305-75(4) of the ITAA 1997.

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 in subsection 305-80(1) of the ITAA 1997 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, Completing your choice to have your Australian super fund pay tax on a foreign super transfer (NAT 11724).

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