Edited version of private advice

Authorisation Number: 1052034433831

Date of advice: 4 October 2022

Ruling

Subject: Foreign superannuation fund death benefit

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:

Income year ended 30 June 20XX

Relevant facts and circumstances

•         The Deceased passed away in the United Kingdom (UK).

•         The Deceased joined the UK Fund (the Fund) prior to you becoming an Australian resident.

•         The Deceased had never been an Australian tax resident.

•         You have inherited the Deceased's benefits in the Fund.

•         The Deceased made contributions to the Fund during the time you were a resident.

•         A lump sum payment has been made to you.

Assumptions

•         You do not know the value of the lump sum at residency date. The lump sum valuation will be estimated using the UK Consumer Price Index.

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

Your inherited benefits from the Deceased's UK Fund have been 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 paid by the Fund is 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 are 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 before you became an Australian resident.

As you became an Australian resident during the period to which the lump sum relates, subsection 305-75(3) of the ITAA 1997 will apply.

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

if you became an Australian resident after the start of the 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 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 tax during the period when you were an Australian resident;

(d)  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, in order to avoid anomalous results in applying the methods in section 305-75 of the ITAA 1997.

For the purposes of subparagraphs 305-75(3)(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(3)(d) 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). 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.

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 Fund into Australia

As the Deceased became a member of the Fund before you became a resident of Australia, the growth in the fund will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

As discussed above, any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is A$1 = £pound;XX.

You should include applicable fund earnings of $XX in your assessable income for the 20XX income year.