Edited version of private advice

Authorisation Number: 1052031586646

Date of advice: 21 September 2022

Ruling

Subject: Foreign superannuation fund death benefit

Question 1

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.

Question 2

Does the period to which the lump sum relates, as referred to in subsection 305-75(2) of the ITAA 1997, commence on the establishment of the Deceased's interest in the Fund?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

The scheme has not yet commenced

Relevant facts and circumstances

The Deceased passed away in the Country A in 20XX.

You have inherited 50% of the Deceased's benefits in the Country A Pension Fund (the Fund).

The Deceased had never been an Australian tax resident.

You became an Australian tax resident prior to the establishment of the Deceased's interest in the Fund.

The Deceased transferred benefits from another Country A pension scheme to establish their interest in the Fund.

Contributions were made to the Fund by the Deceased.

Assumptions

The Fund and the Country A pension scheme meet the definition of a foreign superannuation fund.

You will transfer your total benefits in the Fund to Australia during the 20XX-XX income year.

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 307-5

Income Tax Assessment Act 1997 Section 307-65

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

Death benefit - applicable fund earnings

The Deceased passed away in 20XX and your inherited benefits from the Country A foreign superannuation fund will be transferred to you 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.

Your benefit to be paid by the Fund will be a superannuation lump sum. 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 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.

In this case, the Deceased's interest in the fund to which the lump sum relates, was established after you became an Australian resident. As you were an Australian resident at all times during the period, subsection 305-75(2) of the ITAA 1997 will apply.

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).

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 section 305-75 of the ITAA 1997.

For the purposes of subparagraphs 305-75(2)(a)(i) and (ii) of the ITAA 1997, we are concerned with the amount of contributions and foreign fund transfers into the Fund, by or for the benefit of the Deceased, after you first became a resident.

Paragraph 305-75(2)(c) of the ITAA 1997 requires you to "add the total of all your previously exempt fund earnings (if any)". This must be interpreted as if the amount of previous exempt fund earnings of the Deceased fund member are the previous exempt fund earnings of the death benefit recipient (you).

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 taken out of the foreign superannuation fund.

Under those provisions, any amounts in the lump sum paid 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 (ie 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, instead of being transferred to the second foreign superannuation fund.

The Deceased transferred the total benefits in another Country A pension scheme to the Fund. If the Deceased had been an Australian resident, there would have been a calculation of previously exempt fund earnings. However, as the Deceased was an Australian non-resident at the time of transfer, there was no requirement for a calculation of previously exempt fund earnings. As the Deceased does not have any previously exempt fund earnings, there is no amount to be included in the calculation of your applicable fund earnings when you receive your lump sum payment from the Fund.

On this basis, the period relating to your superannuation lump sum transfer will commence when the Fund was established.

Foreign currency conversion

The foreign currency translation rules for lump sum payments 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 Fund into Australia

As the Deceased became a member of the Fund 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, this will not occur until your benefits are transferred from the Fund to Australia.