Edited version of private advice

Authorisation Number: 1051933759015

Date of advice: 15 December 2021

Ruling

Subject: Lump sum payments from foreign superannuation funds

Question

Is any part of the lump sum payment received from a foreign super fund to an Australian 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:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

The Taxpayer became a resident of Australia for taxation purposes in October 19XX.

While living in Country A, the Taxpayer became a member of the Country A fund.

The rules of the Country A fund provide that benefits can be paid on retirement, long term disability and death.

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

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

In 20XX, the Taxpayer transferred entire balance of the Country A fund to their Australian superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 section 305-80

Reasons for decision

If an individual 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 Country A fund is a foreign superannuation fund. The Taxpayer became an Australian resident after the start of the period to which the lump sum relates. The Taxpayer remained an Australian resident at all times until the lump sum was paid. Therefore, the 'applicable fund earnings' (AFE) 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 the Taxpayer is 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.

An amount of AFE 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 the Taxpayer, or their complying Australian super fund.

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 the Taxpayer on a certain date.

Using an exchange rate of A$1 = £0.xxx as at the payment date, the AFE amount has been calculated in accordance with subsection 305-75(3) of the ITAA 1997.

As the Taxpayer no longer has an interest in the Country A fund, they may be eligible to make an election to have these AFE treated as the assessable income of their Australian superannuation fund. The Taxpayer may elect to havetheir AFE of $xxx(calculated as shown in the table below) treated as the assessable income of their Australian superannuation fund for the 2020-21 income year:

Election

A taxpayer who is transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the applicable fund earnings treated as the assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included in the assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal tax rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1) of the ITAA 1997).