Edited version of private advice

Authorisation Number: 1052046782578

Date of advice: 20 October 2022

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

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

Relevant facts and circumstances

The Taxpayer became a resident of Australia for taxation purposes during 20XX.

While living in the United Kingdom (UK), the Taxpayer became a member of a foreign fund.

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

There have been no transfers into the foreign fund since the Taxpayer became an Australian resident for tax purposes.

The Taxpayer received a lump sum payment from the foreign fund.

The Taxpayer commenced receiving a pension from the foreign fund at the time of the lump sum withdrawal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Relevant 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

ATO Interpretative Decision ATO ID 2012/49: Superannuation lump sum paid from a foreign superannuation fund to an Australian resident at the same time as an annuity commenced: applying section 305-75 of the ITAA 1997

Reasons for decision

Detailed reasoning

Where an individual taxpayer receivesa lump sum from a foreign superannuation fund more than six 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, the UK fund is a foreign superannuation fund. The Taxpayer became an Australian resident after the start of the period to which the lump sum relates. The Taxpayerremained an Australian resident at all times until the lump sum was paid. Therefore, the applicable fund earnings are calculated in accordance with subsection 305-75(3) of the ITAA 1997.

The effect of section 305-75 of the ITAA 1997 is thatthe individual Taxpayer isonly assessed on the income theyearned on theirbenefits in the foreign fund whiletheywere 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 the Taxpayer, or to the Taxpayer's 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.

Using an exchange rate of A$1 = GBP £pound;0.xxxx at the date of payment, the 'applicable fund earnings' amount has been calculated in accordance with subsection 305-75(3) of the ITAA 1997.

It is the Commissioner's view that where an individual commences a pension from the foreign superannuation fund at the same time as the superannuation lump sum is paid from the fund, subsection 305-75(3) of the ITAA 1997 is applied having regard only to the individual's lump sum entitlement. That is, regard is had only to so much of each of the relevant vested amounts that was, at the relevant times, payable as a lump sum. The part of the vested amount that relates to the pension is disregarded.

This approach ensures that the individual is not assessed on earnings that have, in effect, accrued in relation to the pension that will be paid from the foreign superannuation fund. This is consistent with the Commissioner's view in ATO ID 2012/49: Superannuation lump sum paid from a foreign superannuation fund to an Australian resident at the same time as an annuity commenced: applying section 305-75 of the ITAA 1997.

As the Taxpayer received a lump sum amount that was a portion of their interest in the foreign fund, this proportion will be used to calculate the applicable fund earnings in relation to the lump sum amount received.

The Taxpayer should include his applicable fund earnings of $xx,xxx.xx (calculated as shown in the table below) in his assessable income for the 2022 income year.