Edited version of private advice

Authorisation Number: 1052093746695

Date of advice: 10 March 2023

Ruling

Subject: Applicable fund earnings - lump sum transfer from foreign fund

Question

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

Year ended 30 June 20XX

Relevant facts and circumstances

•         While living in a foreign country, the Taxpayer became a member of a Foreign Fund.

•         The taxpayer became a resident of Australia for taxation purposes.

•         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.

•         More than six months after becoming an Australian resident, the Taxpayer received a lump sum payment from the foreign fund.

•         The Taxpayer does not know the value of the lump sum at the residency date. The value has been estimated using the foreign country Consumer Price Index.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Reasons for decision

Lump sum payments transferred from foreign superannuation funds

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.

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as being a superannuation 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'.

Based on the rules of the Foreign Fund, the definition of a foreign superannuation fund has been met.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

In this case, the Foreign Fund to which the lump sum relates, was established before the Taxpayer became an Australian resident. As the Taxpayer was not an Australian resident at all times during the period, subsection 305-75(3) of the ITAA 1997 will apply.

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

If you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earningsis 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 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 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).

The effect of section 305-75 of the ITAA 1997 is that only the income earned in respect of the foreign superannuation fund since Australian residency, less any contributions made in that period, is assessed. Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the lump sum is paid.

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). The Commissioner determined that the exchange rate at which it is reasonable to translate amounts into Australian currency for the purposes of section 305-75 of the ITAA 1997, is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. This will be the time when the Taxpayer transferred their benefits to Australia.

Transfer from Foreign Fund to Australia

As discussed above, any amounts in foreign currency are translated into Australian dollars using the exchange rate applicable on the date of receipt, in this case it is AUD$1 = XXX 0.xxxx.

Table 1: Calculation of applicable fund earnings

Therefore the 'applicable fund earnings' amount in respect of the lump sum amount transferred from the Foreign Fund that should be included in the Taxpayer's assessable income for the 20XX-XX income year is $xxx.