Edited version of private advice

Authorisation Number: 1052361684833

Date of advice: 24 February 2025

Ruling

Subject: Applicable Fund Earnings

Question 1

Is any part of the lump sum payment received by the Taxpayer from the foreign fund (the Fund) assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes, the applicable fund earnings are $XX,XXX.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

XX XXX 20XX

Relevant facts and circumstances

The Taxpayer became a resident of Australia for taxation purposes on XX XX 20XX

While living in foreign country, the Taxpayer became a member of the Fund.

The Taxpayer provided evidence from the Fund to support the value of policy vested in the Taxpayer on the date before the residency date.

There have been no contributions into the fund since the Taxpayer became an Australian resident for tax purposes.

The Taxpayer states there have been no transfers into the fund since the Taxpayer became an Australian resident for tax purposes.

On XX XX 202X the Taxpayer received a lump sum payment of XX,XXX.XX from the Fund.

On XX XX 202X, the value of the Taxpayer's benefit in the Fund was XXX,XXX.XX.

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 section 960-50

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

Reasons for decision

Applicable Fund Earnings

If you receivea lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, yourassessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while you were an Australian resident.

In this case, the Fund is a foreign superannuation fund. The Taxpayer became an Australian resident before the start of the period to which the lump sum relates. They remained an Australian resident at all times until the lump sum was paid. Therefore, the applicable fund earnings is calculated in accordance with subsection 305-75(3) of the ITAA 1997.

As the Taxpayer received a lump sum amount that was a portion of their interest in the foreign fund, this proportion will be used to calculate the applicable fund earnings in relation to the lump sum amount received.

This approach ensures that the individual is not assessed on earnings that have, in effect, accrued in relation to the pension that will be paid from the foreign superannuation fund. This is consistent with the Commissioner's view in ATO ID 2012/49: Superannuation lump sum paid from a foreign superannuation fund to an Australian resident at the same time as an annuity commenced: applying section 305-75 of the ITAA 1997.

The effect of section 305-75 of the ITAA 1997 is thatthe Taxpayer are only assessed on the income they earned ontheir benefits in the foreign fund whilethey were an Australian resident. Earnings during periods of non-residency, contributions and transfers into the foreign fund are not taxable when the overseas benefit 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.

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.

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). We use the exchange rate that applied when the Taxpayer received the lump sum, to work out the Australian dollar equivalent for the amount in the foreign superannuation fund that was vested in them on a certain date.

Using an exchange rate of A$1 = 0.XXXX as XX/XX/20XX, the 'applicable fund earnings' amount has been calculated in accordance with subsection 305-75(3) of the ITAA 1997.

The Taxpayer should include their applicable fund earnings of $XX,XXX in their assessable income for the 20XX income year.

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