Edited version of private advice

Authorisation Number: 1051939557773

Date of advice: 14 March 2022

Ruling

Subject: Applicable fund earnings

Question

Is any part of the lump sum payment received by you from the foreign fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 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

You migrated to Australia more than XX years ago.

The value of the Plan on the date was X.

The rules of the Plan provide that benefits can be paid for retirement and ill health.

In the 20XX-XX income year you received a lump sum payment from the foreign fund.

There were no personal contributions made to the Plan since you became an Australian resident.

There were no transfers from another fund to the Plan since you became an Australian resident.

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 307-15

Income Tax Assessment Act 1997 Section995-1

Superannuation Industry (Supervision) Act 1993 Section 10(1)

Reasons for decision

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as being a superannuation 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'.

Based on the rules of the foreign fund, the fund meets the definition of a superannuation fund as it is not an Australian superannuation fund, and is a foreign superannuation fund.

When a person receives a lump sum payment from a foreign superannuation fund more than six months after they became an Australian resident, an amount may be included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) 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 income 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 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 you received the lump sum, to work out the Australian dollar equivalent for the amount in the foreign superannuation fund that was vested in you on a certain date.

The calculation of the applicable fund earnings in relation to the lump sum payment received from the foreign fund has been calculated in accordance with subsection 305-75(3) of the ITAA 1997.