Edited version of private advice

Authorisation Number: 1051974199095

Date of advice: 20 April 2022

Ruling

Subject: Foreign fund transfer

Question

Is any part of the lump sum benefit payment, received by Fund B from Fund A, previously exempt fund earnings for the purposes of the applicable fund earnings calculation under section 305-75 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

You became a resident of Australia for income tax purposes during the 20XX-XX income year.

You became a member of Fund A more than XX years ago.

During 20XX, total benefits of GBP xxx were transferred from Fund A to Fund B.

Both Fund A and Fund B are Country A registered superannuation schemes. Benefits cannot be accessed before 55 unless under exceptional circumstances such as ill health or death.

Assumptions

You do not know the value of your interest in Fund A at residency date. You will estimate the lump sum valuation using the Country A Consumer Price Index that includes the owner occupiers' housing costs (CPIH).

You intend to transfer the entire interest from Fund B to your self managed superannuation 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 995-1(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

Foreign superannuation fund definition

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 in Fund A and Fund B could not be accessed other than at retirement, death or incapacity and therefore meet the definition of a foreign superannuation fund.

Applicable fund earnings

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.

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 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).

Subsection 305-75(2) of the ITAA 1997 states, if you were an Australian resident at all times during the period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows:

(a) work out the total of the following amounts:

(i) the part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

(ii) the part of the lump sum (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) add the total of all your 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. Further, 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.

Previously exempt fund earnings

Any part of the super lump sum that is transferred into another foreign super fund is exempt from tax under subsection 305-70(4) of the ITAA 1997.

The previously exempt fund earnings provisions (305-75(5) & (6) of the ITAA 1997) allow an individual to defer Australian income tax by making payments from one foreign superannuation fund to another foreign superannuation fund. Such payments can only be assessed for Australian income tax when they are eventually transferred into Australia.

Under those provisions, any amounts in the lump sum paid to Australia by a foreign superannuation fund, which had previously been transferred into that fund from a second foreign superannuation fund, are included in applicable fund earnings (i.e. as assessable income) to the extent that they would have been included in assessable income under subsection 305-70(2) of the ITAA 1997 if they had originally been paid to Australia instead of being transferred to the second foreign superannuation fund.

You became a resident of Australia for tax purposes in the 20XX-XX income year. Benefits in Fund A were transferred to Fund B in the 20XX year. Subsequently, there will be a calculation of previously exempt fund earnings that will be included in the applicable fund earnings calculation when calculating any applicable fund earnings in the final foreign lump sum payment to Australia. You will use the Country A CPIH to estimate the lump sum value at residency date, which is an acceptable method in this case.

Foreign currency conversion

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. 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.

Previously exempt fund earnings - transfer: Fund A to Fund B

As You became a member of Fund A before you became a resident of Australia, the growth will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

Since Fund A and Fund B are both foreign superannuation funds, these amounts are not assessable as per subsection 305-70(4) of the ITAA 1997. However, they will be classified as previously exempt fund earnings according to subsections 305-75(5) and 305-75(6) of the ITAA 1997 and hence included in the applicable fund earning calculations for a lump sum transfer from Fund B to Australia.