Edited version of private advice

Authorisation Number: 1052154934788

Date of advice: 17 August 2023

Ruling

Subject: Taxation treatment - foreign superannuation lump sum benefit

Question 1

Is the Fund 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 from the UK Fund, included in the Taxpayer's assessable income for the 2021-22 income year under section 305-70 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 2021 to 30 June 2022

The scheme commences on

1 July 2021

Relevant facts and circumstances

The Taxpayer held an interest in the Fund.

The Taxpayer joined the Fund in the 1980's.

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

The Fund is a defined benefit pension scheme which delivers a specified income for life based on a member's pensionable salary and length of pensionable service

On retirement the member will receive a pension payable for life and a lump sum.

Death benefits are also payable.

Since the Taxpayer became an Australian resident, they have remained an Australian resident.

The Taxpayer received a lump sum payment from the Fund.

The Taxpayer still has an interest in the Fund supporting a pensionable salary.

No contributions have been made into the Fund by or for the Taxpayer since they 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 Subsection 295-95(2)

Income Tax Assessment Act 1997 Section 305-55

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 19

Reasons for decision

Question 1

Summary

The Fund is a foreign superannuation fund as per subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

Lump sum payments received from certain foreign superannuation funds

Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation lump sum benefits paid from foreign superannuation funds and other foreign schemes for the payment of similar retirement or death benefits, as defined in section 305-55 of the ITAA 1997.

Before determining whether an amount is assessable income under subdivision 305-B of the ITAA 1997, it is necessary to determine whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund (or scheme for the payment of superannuation benefits), Subdivision 305-B will not apply to the payment.

Meaning of 'foreign superannuation fund'

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.

Consequently, Subdivision 305-B of the ITAA 1997 does apply to the lump sum payments that you received from the Fund.

Question 2

Summary

Part of the lump sum payment received from the Fund by the Taxpayer is applicable fund earnings under section 305-70 of the ITAA 1997. The amount of should be included in the Taxpayer's assessable income.

Detailed reasoning

Applicable fund earnings

If you receive a superannuation lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, section 305-70 of the ITAA 1997 includes in your assessable income the growth (applicable fund earnings) earned on the foreign superannuation interest while you were an Australia resident.

If the lump sum is paid directly to you, the applicable fund earnings amount is taxed at your marginal tax rate.

Only the applicable fund earnings amount is assessable income. The remainder of the lump sum payment is not assessable income and is therefore tax-free.

In your case, a superannuation lump sum was transferred to the Taxpayer, which is more than six months after he became an Australian resident.

Therefore, the Taxpayer is required to include the assessable income from applicable fund earnings in his personal income tax return.

Applicable fund earnings amount - Calculation

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 earnings is 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).

Subsection 305-75(2) of the ITAA 1997 states, if you were an Australian resident at all times during the period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows:

a)  work out the total of the following amounts:

(i) the part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

(ii) the part of the lump sum (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)   add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6).

Subsection 305-75(3) of the ITAA 1997 applies to the Taxpayer as he was not an Australian resident at all times during the period to which the superannuation lump sum relates.

The effect of subsection 305-75(3) of the ITAA 1997 is that a Taxpayer is only assessed on the income earned on their benefits in the Fund since he became an Australian resident. Any amounts from contributions made by (or on behalf of) the Taxpayer or transferred from other foreign funds are not taxable in Australia when the overseas benefit 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 transfers his benefits from the Fund 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 his interest in the 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 he 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.

The Taxpayer should include their applicable fund earnings in their assessable income for the 2021-22 income year.