Edited version of private advice

Authorisation Number: 1051825554348

Date of advice: 14 June 2021

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1

Will any part of the lump sum benefit transferred from your foreign superannuation fund to your self-managed superannuation fund (SMSF) be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Can you make an election in accordance with section 305-80 of the ITAA 1997 to have the applicable fund earnings included in your SMSF's assessable income?

Answer

Yes

Question 3

Will the portion of the lump sum, transferred to your SMSF that is not applicable fund earnings, be non-assessable non-exempt income as per subsection 305-70(3) of the ITAA 1997?

Answer

Yes

Question 4

Will any part of the lump vested amount be treated as a concessional contribution in accordance with section 291-25 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

You relocated from Australia to the Country A in September 20XX to take up employment.

You became a member of Fund A in January 20XX. You also became a member of the Fund B in March 20XX.

The Funds' rules are structured to comply with the minimum standards required for a retirement scheme under Country A legislation. A member's interest in the Fund is preserved until the member attains their normal retirement age of 60. Members benefits may also be paid on death and incapacity grounds.

You became an Australian resident for tax purposes from March 20XX and have remained a resident at all times since.

Your employer made a XXX contribution to Fund B, on or around July 20XX, relating to a company arrangement for the cessation of your Country A employment. No other contributions have been made to the Fund since residency date.

No benefits have been transferred into the Funds from any other source since residency date.

You intend to withdraw the entire lump sum from both Fund A and Fund B.

You are a member of a self-managed superannuation fund (SMSF).

You are considering transferring the total benefits from Fund A and Fund B to your SMSF.

You will have a total superannuation balance in excess of $XXX at the time of the transfers to your SMSF.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 292-90

Income Tax Assessment Act 1997 section 295-200

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 section307-230

Income Tax Assessment Act 1997 section 960-50

Income Tax Assessment Act 1997 section 995-1

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

Question 1

Lump sum payments transferred from foreign superannuation funds

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, which requires that the fund is a 'provident, benefit, superannuation or retirement fund'.

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

Applicable fund earnings

You became a resident of Australia for tax purposes in March 20XX. You intend to transfer the entire benefits from Fund A and Fund B to your SMSF during the 20XX year of income.

As the lump sum transfer will be more than six months after you became an Australian resident, 'applicable fund earnings' will apply.

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).

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. Furthermore, 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.

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.

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, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. 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.

For the transfer made from Funds A and B to your SMSF, the exchange rate applicable to the transfer is the date on which the lump sum is made into Australia.

Application to your scenario

Your benefits have not yet been transferred from the foreign funds to Australia. Therefore, a calculation is not required. However, as an example, the following will apply for the future transfer of benefits held in Fund B.

Amount of lump sum vested in the taxpayer in Fund B on the day just before the residency date is XXX. Add employer contributions to Fund B during the remainder of the period, XXX = total of XXX. You will subtract this total from the amount vested in you in Fund B when the lump sum is transferred to Australia.

Any amounts in XXX currency are translated into Australian dollars using the exchange rate applicable on the day of receipt.

Question 2

Applicable fund earning election

In accordance with section 305-80 of the ITAA 1997, 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 SMSF. 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 SMSF - as per subsection 295-200(2).

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.

Where the transfer is made to your SMSF and you do not meet the above conditions, you must still include any applicable fund earnings in your personal assessable income, however you cannot elect to include any of the amount in your fund's assessable income.

Question 3

Tax treatment

In accordance with subsection 305-70(2) of the ITAA 1997, your applicable fund earnings will be included in your personal assessable income or with a valid election, in your SMSF's assessable income.

Subsection 305-70(3) of the ITAA 1997 provides that the remainder of the lump sum transfer, that is not applicable fund earnings, is not assessable income and is not exempt income.

Any amount of the lump sum transferred into your SMSF, that is not included in the fund's assessable income as applicable fund earnings, will be a non-concessional contribution in accordance with subsection 292-90(2) of the ITAA 1997.

Questions 4

Concessional contributions

Concessional contributions are defined in section 291-25 of the ITAA 1997 and includes a contribution that is assessable income of a complying superannuation fund. However, paragraph 291-25(2)(c) excludes applicable fund earnings that are included in the fund's assessable income due to an election made under section 305-80.

An assessable foreign fund transfer amount will count towards your concessional contributions cap. This will be the portion that exceeds the amount that was 'vested' in you, as the fund member, at the time of the transfer. As an example, this could be the result of the exercise of discretion by the trustee of the foreign super fund to allocate an amount to your account at the time of transfer.

Based on the facts presented, a transfer from your foreign funds to your SMSF will not result in a concessional contribution.