Edited version of private advice

Authorisation Number: 1051999877901

Date of advice: 5 August 2022

Ruling

Subject: Foreign fund transfer

Question

Is any part of the lump sum payment received by Person A from Fund A and Fund B 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 periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

•         You became a member of Fund A prior to residency date.

•         You emigrated permanently to Australia.

•         You transferred your total benefits from Fund A into Fund B during 20XX.

•         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 intend to transfer benefits from Fund B to Australia during 20XX-XX financial year.

•         You do not know the value of the lump sum at residency date. You will estimate the lump sum valuation using the Country A Consumer Price Index (CPI).

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)

Superannuation Industry (Supervision) Act 1993 Subsection 62

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

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.

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 (SISA), which requires that the fund is a 'provident, benefit, superannuation or retirement fund'.

In section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur:

•         on or after retirement from gainful employment; or

•         attaining a prescribed age; and

•         on the member's death. (this may require the benefits being passed on to a member's dependants or legal representative).

The Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SISA.

In this case, the benefits from your Fund's A and B cannot 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 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 an Australian resident when it was your intention to live permanently in Australia. During 20XX you transferred your total benefits in Fund A to Fund B. Subsequently, there will be a calculation of previously exempt fund earnings that will be included in the applicable fund earnings calculation when you eventually transfer your foreign lump sum payment to Australia. You will use the Country A CPI 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 (ATO ID 2015/7). The Commissioner determined that the exchange rate at which it is reasonable to translate amounts into Australian currency for the purposes of section 305-75 of the ITAA 1997, is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. This will be the time when you transfer your benefits from Fund B to Australia.

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

As you became a member of the 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 the 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 when you later transfer the benefits from Fund B to Australia.

Transfer from Fund B into Australia

As you became a member of Fund B after you became a resident of Australia, the growth in the fund will be worked out in accordance with subsection 305-75(2) of the ITAA 1997. However, as stated above this will not occur until your benefits are transferred from Fund B to Australia.

You also have an amount of previously exempt fund earnings in respect of the lump sum paid to Fund B during 20XX. The previously exempt fund earnings attributable to this lump sum represent the amount that would have been included in your assessable income if you had personally been paid the lump sum when it was transferred from the Fund A to Fund B.