Edited version of private advice

Authorisation Number: 1052176767707

Date of advice: 24 October 2023

Ruling

Subject: Applicable fund earnings

Question

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

Period ending 30 June 2022

The scheme commences on:

1 July 2021

Relevant facts and circumstances

While living overseas, the Taxpayer became a member of a XXX Fund.

The Taxpayer became a resident of Australia for taxation purposes.

The Taxpayer had withdrawn their lump sum payment on retirement date, the lump sum payment represents 25% of their total benefits, with the remainder taken as a pension.

The administrators of the XXX Fund are unable to provide a value amount in the scheme that was vested in theTaxpayer on residency date. We have estimated the fund's value in respect to the lump sum payment on residency date.

There have been no contributions made into the XXX Fund since the Taxpayer became an Australian resident for tax purposes. There have been no transfers into the XXX Fund since the Taxpayer became an Australian resident for tax purposes.

The Taxpayer can only access his superannuation benefits from the XXX Fund when they retire.

On DD MM YYYY, the Taxpayer received a lump sum payment of XXX XX (Australian dollar $X) from the XXX Fund. The payment was made into the Taxpayer's Australian bank account.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 section 995-1

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

Reasons for decision

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

In this case, the benefits from the XXX Fund cannot be accessed other than at retirement, and therefore meet the definition of a foreign superannuation fund.

If an individual taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, the Taxpayer's assessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while the Taxpayer was an Australian resident.

The Taxpayer became an Australian resident after the start of the period to which the lump sum relates. The Taxpayer was not an Australian resident at all times during which the lump sum relates. Therefore, the applicable fund earnings is calculated in accordance with subsection 305-75(3) of the ITAA 1997.

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 the individual taxpayer is only assessed on the income they earned on their benefits in the foreign fund while they were an Australian resident. Earnings during periods of non-residency, contributions and transfers into the foreign fund are not taxable when the overseas benefit 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.

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's view is 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.

Transfer from XXX Fund to Australia

As you became a member of the XXX 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.

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 you received a lump sum amount that was a portion of your interest in the XXX Fund, this proportion will be used to calculate the applicable fund earnings in relation to the lump sum amount received.

Using a conversion rate of A$1 = XXX X0.xxxx payment date, the 'applicable fund earnings' amount has been calculated in accordance with subsection 305-75(3) of the ITAA 1997.

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