Edited version of private advice

Authorisation Number: 1052018888403

Date of advice: 21 December 2022

Ruling

Subject: Foreign death benefits

Question

Is any part of the death benefit lump sum payment 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 and their parent immigrated to Australia from the Country A.

On DD MM YYYY the Taxpayer became a resident of Australia for taxation purposes.

The Taxpayer's parent (the Deceased) passed away on DD MM YYYY.

The Deceased was a member of the Plan.

The balance of the Deceased's interest in the Plan on DD MM YYYY was XX.

There were no contributions or foreign fund transfers into the Plan since the Taxpayer became a resident of Australia.

The Taxpayer inherited one-third of the Deceased's benefits in the Plan.

On DD MM YYYY the Taxpayer received a lump sum of XX equivalent to AUD $XX from the Plan. The lump sum was paid into their Australian bank account.

The rules of the Plan provide that superannuation benefits can only be paid for retirement, ill-health and death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 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 6 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, 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 the Plan cannot be accessed other than at retirement, death or incapacity and therefore meet the definition of a foreign superannuation fund.

Death benefit - applicable fund earnings

The Deceased passed away in 20XX and the Taxpayer's inherited benefits from the Plan were transferred to them in Australia.

Section 307-65 of the ITAA 1997 defines a superannuation lump sum as a superannuation benefit that is not a superannuation income stream benefit. Section 307-5 includes in the definition of a superannuation benefit a payment to a taxpayer from a superannuation fund, after another person's death, because the other person was a member of the fund.

The Taxpayer's benefit paid by the Plan is a superannuation lump sum. When a person receives a lump sum from a foreign superannuation fund more than 6 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 is the amount worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. The "you" first appearing in these subsections is the death benefit recipient. Consequently, where the death benefit recipient was an Australian resident for the whole of the period to which the lump sum relates subsection 305-75(2) of the ITAA 1997 applies, and where the death benefit recipient became a resident during that period subsection 305-75(3) applies. The period of Australian residence of the deceased fund member is not relevant in determining which subsection applies.

As the Taxpayer became a resident after the period to which the lump sum relates the method in subsection 305-75(3) of the ITAA 1997 applies to work out the amount of applicable fund earnings.

Subsection 305-75(3) of the ITAA 1997 states:

If you become an Australian resident after the start period to which the lump sum relates (but before you received it) 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 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 remainder of the period

(b) subtract that total 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).

In the situation of death benefit payments some of the references to "you" and "your" in the legislation, which literally refer to the death benefit recipient, must be interpreted as referring to the deceased fund member to avoid anomalous results in applying the methods in subsection 305-75 of the ITAA 1997.

As an example, for the purposes of subparagraph 305-75(3)(a)(i) of the ITAA 1997 we are concerned with the amount in the foreign fund that was vested in the Deceased at the time the Taxpayer became a resident. This taxes the earnings for the period the Taxpayer was an Australian resident. The Deceased became a member of the Plan before the Taxpayer became an Australian resident.

For the purposes of subparagraph 305-75(3)(a)(ii) of the ITAA 1997 we are concerned with the amount of contributions made by or for the benefit of the Deceased after he Taxpayer first became a resident.

An amount of applicable fund earnings 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.

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 applies when you receive the lump sum, to translate the amounts used in the calculation of applicable fund earnings under subsection 305-75(2) of the ITAA 1997 into the Australian dollar equivalent.

Transfer from the Plan into Australia

Using an exchange rate of A$1 = XX as at DD MM YYYY, the 'applicable fund earnings' amount has been calculated in accordance with subsection 307-75(3) of the ITAA 1997.

The Taxpayer should include his applicable fund earnings of $XXX in his assessable income for the 20XX-XX income year.