Edited version of private advice

Authorisation Number: 1051888434594

Date of advice: 19 August 2021

Ruling

Subject: Lump sum payment from a foreign fund

Question

Is any part of the lump sum payment received from the foreign pension scheme 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:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your client migrated to Australia in the 20XX-XX income year and has been an Australian resident for taxation purposes since that date.

Your client has an interest in a foreign fund.

Your client provided the value of their interest in the foreign fund as at the date of their Australian residency.

There have been no contributions into the foreign fund since your client became an Australian resident for taxation purposes.

There have been no transfers into the foreign fund since your client became an Australian resident for taxation purposes.

Your client could not access their benefits in the foreign fund other than at retirement.

In the 20XX-XX income year your client received a lump sum payment from the foreign fund, which was paid into your client's Australian bank account.

Your client is in receipt of a monthly pension from the foreign fund.

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 305-75(3)

Reasons for Decision

Summary

A portion of the lump sum payment your client received from the foreign fund must be included as 'applicable fund earnings' in their income tax return for the 20XX-XX income year. The assessable applicable fund earnings is calculated as $X.

Detailed reasoning

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

In this case, the foreign fund is a foreign superannuation fund. Your client became an Australian resident after the start of the period to which the lump sum relates. Your client 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.

The effect of section 305-75 of the ITAA 1997 is that you are only assessed on the income you earned on your benefits in the foreign fund while you 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.

The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum is not assessable income and not exempt income.

The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in ATO Interpretative Decision ATO ID 2015/7: Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997. 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 the taxpayer on a certain date.