Edited version of private advice

Authorisation Number: 1052001064353

Date of advice: 22 July 2022

Ruling

Subject: Foreign fund transfer

Question

Is any part of the lump sum payment received by the Taxpayer from their foreign fund (the 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

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

•         The Taxpayer became a resident of Australia for income tax purposes in 19XX-XX income year.

•         The Taxpayer became a member of the Fund in the 19XX-XX income year.

•         The Fund was unable to advise the transfer value on the day immediately prior the Taxpayer became an Australian tax resident.

•         The Taxpayer received a lump sum payment from the Fund in 20XX.

•         There were no contributions or transfers made to the Fund since the Taxpayer became an Australian tax resident.

•         We are satisfied that the Fund meets the definition of a 'foreign superannuation fund' under section 995-1 of the ITAA 1997.

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

Summary

The 'applicable fund earnings' amount in respect of the lump sum payment received from the foreign superannuation fund to be included in the Taxpayer's assessable income for the 20XX-XX income year is $X.

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 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'.

In this case, the benefit from your Fund cannot be accessed other than at retirement, death or incapacity and therefore the Fund meets the definition of a foreign superannuation fund.

Applicable fund earnings

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 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 becomes an Australian resident after the start of 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 effect of section 305-75 of the ITAA 1997 is that a taxpayer is only assessed on the income earned on their benefits in the fund since they became an Australian resident. Any amounts from contributions made by (or on behalf of) the Taxpayer or transferred from other foreign funds are not taxable in Australia when the overseas benefit is paid.

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). 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.