Edited version of private advice

Authorisation Number: 1052019439739

Date of advice: 11 August 2022

Ruling

Subject: Lum sum transfer

Question 1

Is any part of the lump sum payment received from Fund C 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

While living overseas, the Taxpayer became a member of Fund A.

While living overseas, the Taxpayer also became a member of Fund B.

Both Fund A and Fund B are defined benefits foreign funds.

The Taxpayer was unable to provide the amount in Fund A and Fund B that was vested in the Taxpayer on the day before their Australian residency.

The taxpayer became a resident of Australia for tax purposes more than XX years ago.

Between 20XX and 20XX the Taxpayer consolidated their interests in Fund A and Fund B into Fund C.

There have been no contributions into either of the foreign funds since the Taxpayer became an Australian resident for tax purposes.

There have been no other transfers into Fund C since the Taxpayer became an Australian resident for tax purposes.

The Taxpayer could not access benefits in Fund C other than at retirement.

In the 20XX-XX income year, the Taxpayer received a XX% Pre Commencement Lump Sum payment from Fund C.

Assumptions

The Taxpayer agreed to estimating the value at residency in Fund A and Fund B using the UK Retail Price Index (RPI) and Consumer Price Index (CPI) for the purposes of calculating previously exempt fund earnings.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Reasons for decision

Summary

A portion of the lump sum payment received from Fund C must be included as 'applicable fund earnings' in assessable income for the 20XX-XX income year. The assessable applicable fund earnings is calculated as $X.

Detailed reasoning

If an individual taxpayer receives a lump sum from a foreign superannuation fund more than 6 months after becoming an Australian resident, the taxpayer's assessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while the taxpayer was an Australian resident.

In this case, Fund C is a foreign superannuation fund. The Taxpayer became an Australian resident after the start of the period to which the lump sum relates. The Taxpayer remained an Australian resident at all times until the lump sum was paid. Therefore, the applicable fund earnings is calculated in accordance with subsection 305-75(3) of the ITAA 1997.

The effect of section 305-75 of the ITAA 1997 is that the individual taxpayer is only assessed on the income they earned on their benefits in the foreign fund while they were an Australian resident. Earnings during periods of non-residency, contributions and transfers into the foreign fund are not taxable when the overseas benefit is paid.

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 you, or your complying Australian super fund.

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 the Taxpayer received the lump sum, to work out the Australian dollar equivalent for the amount in the foreign superannuation fund that was vested in the Taxpayer on a certain date.

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