Edited version of private advice

Authorisation Number: 1052100302758

Date of advice: 23 March 2023

Ruling

Subject: Foreign fund transfer

Question

Is any part of the lump sum payment received by you from the fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This private ruling applies for the periods:

DDMMYYYY to DDMMYYYY

Relevant facts and circumstances

You became a member of the fund on DDMMYYYY.

You became a resident of Australia for tax purposes on DDMMYYYY.

You did not make any further payments into the fund since migrating to Australia.

There have been no transfers into the fund since you became an Australian resident.

On DDMMYYYY, your total benefits were paid from the fund to your self-managed superannuation fund (SMSF). The RBA exchange rate on that date was AUD $1 = GBP £pound;0.xxxx.

The estimated value of the lump sum amount at residency date has been based on the pension value growth, as per the member information statement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 295-200(2)

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Section 305-80

Income Tax Assessment Act 1997 Section 307-15

Income Tax Assessment Act 1997 Section 960-50

Other relevant documents

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

Applicable fund earnings

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 fund 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 amount is worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 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 fund to which the lump sum relates, was established before you became an Australian resident. As you were 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 (but before you received it), 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 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

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars. The applicable fund earnings are the result of a calculation from other amounts and subsection 960-50(4) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 to amounts that are elements in the calculation of another amount you need to:

•         first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

•         then, calculate the other amounts.

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, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. 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.

For the transfer made from the fund during the 2022 income year, the exchange rate applicable to the transfer is the date on which the lump sum was made to Australia.

Transfer from Fund to Australia

As you became a member of the fund before you became a resident of Australia, the growth 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;0.xxxx.

Table 1: Exchange rate applicable on the date of receipt

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

Applicable fund earning election

You may choose to pay the lump sum into a complying superannuation fund. You can elect to have all or part of your applicable fund earnings included in the assessable income of your SMSF. If you do, then the amount of the super lump sum that you will include in your personal assessable income is the applicable fund earnings reduced by the amount of the applicable fund earnings you have chosen to be assessed in the SMSF - as per subsection 295-200(2) of the ITAA 1997.

The choice can only be made if the following conditions in subsection 305-80(1) of the ITAA 1997 are satisfied:

•         the person is taken to have received the lump sum under section 307-15 of the ITAA 1997 for their benefit or at their direction

•         the whole of the lump sum is paid directly from the foreign superannuation fund into a complying superannuation fund; and

•         the person no longer has an interest in the foreign superannuation fund immediately after the lump sum is paid.

Where the transfer is made to your SMSF and you do not meet the above conditions, you must still include any applicable fund earnings in your personal assessable income, however you cannot elect to include any of the amount in your fund's assessable income.

Your concessional contributions exclude applicable fund earnings that are included in the fund's assessable income due to the election made under section 305-80 of the ITAA 1997.

Any amount of the lump sum transfer that is not included in the fund's assessable income as applicable fund earnings will be a non-concessional contribution.

You must make your election on the approved form, Completing your choice to have your Australian super fund pay tax on a foreign super transfer (NAT 11724).