Edited version of private advice

Authorisation Number: 1052121665245

Date of advice: 7 June 2023

Ruling

Subject: Taxation treatment - foreign superannuation lump sum benefit

Question 1

Is the United Kingdom Pension Scheme a 'foreign superannuation fund' as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is any part of the lump sum payment received by the Taxpayer included in his assessable income for the 2020-21 income year under section 305-70 of the ITAA 1997?

Answer

Yes.

This private ruling applies for the financial year ended:

30 June 2021

The scheme commences on:

1 June 2020.

Relevant facts and circumstances

The Taxpayer held an interest in a foreign superannuation fund. (the Fund).

The Taxpayer joined the fund prior to becoming an Australian resident.

The Fund is a United Kingdom (UK) pension scheme established and managed overseas.

The Fund is a closed defined benefit pension Scheme.

The Taxpayer built up a guaranteed pension in the Fund.

Under the Fund options, the Taxpayer agreed to take a lump sum and an annual pension paid monthly.

Death benefits are payable as defined in the Fund rules.

During 2020, the Taxpayer received a tax free lump sum payment from the Fund.

The Reserve Bank of Australia exchange rate on this date was AUD $1 = GBP xxx.

No contributions have been made into the Fund by or for the Taxpayer since he became an Australian resident.

There have been no transfers into the Fund from other foreign funds since the Taxpayer became an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 Subsection 10(1)

Superannuation Industry (Supervision) Act 1993 Section 62

We followed these ATO view documents

ATO Interpretative Decision 2015/7: Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997

ATO Interpretative Decision 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

Foreign superannuation fund definition

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 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 (SISA), which requires that the fund is a 'provident, benefit, superannuation or retirement fund'.

In section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur:

•         on or after retirement from gainful employment; or

•         attaining a prescribed age; and

•         on the member's death. (this may require the benefits being passed on to a member's dependants or legal representative).

The Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SISA.

In this case, the benefits from the Fund cannot be accessed other than at retirement, death or incapacity and therefore it meets the definition of a foreign superannuation fund.

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.

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.

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 you transfer your benefits from your foreign funds to Australia.

Proportionate approach is allowed

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 the Taxpayer's interest in the foreign fund, this proportion will be used to calculate the applicable fund earnings in relation to the lump sum amount received.

Calculation of your applicable fund earnings

As the Taxpayer became a member of the Fund before becoming 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;xxx.

The Taxpayer should include applicable fund earnings of $xxx in assessable income for the 2021-21 income year.