Edited version of private advice

Authorisation Number: 1051933589622

Date of advice: 10 February 2022

Ruling

Subject: Lump sum payment from a foreign fund

Question

Is any part of the lump sum payment from your foreign superannuation fund 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

Relevant facts and circumstances

The taxpayer migrated to Australia in the 19XX-XX income year and has been an Australian resident for taxation purposes since that date.

The taxpayer had an interest in a foreign fund.

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

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

The taxpayer could not access their benefits in the foreign fund other than at retirement.

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

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)

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

Summary

A portion of the lump sum payment the taxpayer 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 the taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, their assessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while they were an Australian resident.

In this case, the foreign fund is a foreign superannuation fund. The taxpayer became an Australian resident after 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.

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

As discussed above, any amounts in foreign currency are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is AUD $1 = Foreign Currency X.

Accordingly, a final amount of $X is to be included as assessable 'applicable fund earnings' in the taxpayer's income tax return for the 20XX-XX income year.