Edited version of private advice

Authorisation Number: 1052118679864

Date of advice: 15 May 2023

Ruling

Subject: Lump sum transfer from a foreign superannuation fund

Question 1

Will an interim and final payment from the United Kingdom (UK) pension scheme be taxed in Australia as lump sum payments pursuant to section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the applicable fund earnings on the interim payment from the UK pension scheme, nil?

Answer

Yes.

Question 3

Is the start date for the applicable fund earnings calculations under section 305-75, for the final payments, the day after the interim payment was made from the respective UK scheme, as per subparagraph 305-75(3)(a)(i) and subsection 305-75(4) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.      The Taxpayer became a resident of Australia for tax purposes in the 20XX-XX income year.

2.      The Taxpayer held benefits in a registered UK pension scheme.

3.      The Taxpayer's benefit was transferred from the UK pension scheme to Australia after he became a resident of Australia.

4.      In the 20XX-XX income year an interim lump sum payment was transferred from the UK pension scheme to the Taxpayer.

5.      The Taxpayer is considering transferring their entire benefit in the UK pension scheme to Australia as a lump sum payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

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 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 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 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.

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 you, or your complying Australian super fund.

Subsection 305-75(4) of the ITAA 1997 is relevant for calculating the applicable fund earnings where multiple lump sums have been paid to you from the same foreign fund:

If the lump sum is not the first lump sum from the fund you have received to which this section applies, for subsections (2) and (3) the start day is the day after you received the most recent such lump sum.

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 transfers their benefits to Australia.

Interim transfer

As the taxpayer became a member UK pension scheme before they 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: Amounts in pound sterling translated into Australian dollars using exchange rate applicable on the date of receipt

1.    The 'applicable fund earnings' amount in respect of the lump sum payment transferred from the UK pension scheme is nil.