Edited version of private advice

Authorisation Number: 1052269260244

Date of advice: 1 August 2024

Ruling

Subject: Foreign superannuation fund

Question

Will the payments from the Fund be taxed in Australia as superannuation lump sums from a foreign superannuation fund pursuant to section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

1 July 2023 to 30 June 2024

Relevant facts and circumstances

You became a resident of Australia for taxation purposes in 20XX.

While living in Country A you became a member of the Fund.

The value of your benefits in the Fund at residency date were provided by the Fund.

You received the first lump sum payment from the Fund into your XXX bank account. The RBA exchange rate on this date was AUD $1 = Foreign currencyXXX.

Later in the income year your remaining total benefits were paid from the Fund. The RBA exchange rate on this date was AUD $1 = Foreign currencyXXX.

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

There have been no transfers into the Fund since you became an Australian resident for tax purposes.

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 305-80

Income Tax Assessment Act 1997 Section 960-50

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, then broadly, the earnings 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 in, relation to a lump sum paid from a foreign superannuation fund, under either subsection 305-75(2) or subsection 305-75(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 receive it), 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).

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.

Multiple lump sum payments

Where multiple lump sums have been paid to you from the same foreign superannuation fund, then subsection 305-75(4) of the ITAA 1997 provides a modification to the calculation of applicable fund earnings. The subsection provides:

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.

Where you are not an Australian resident at all times during the period to which a lump sum relates, and the lump sum is not the first lump sum paid from the fund, then subsection 305-75(4) of the ITAA 1997 modifies the applicable fund earnings calculation under subsection 305-75(3) of the ITAA 1997. Similarly, the 'start date' in paragraph 305-75(3)(a)(i) of the ITAA 1997 for the purpose of calculating the amount vested in you just before you first became an Australian resident during the period, is modified to the day after you received the most recent lump sum.

Foreign currency conversion

The foreign currency translation rules for lump sums paid by 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).

For the purposes of working out your applicable fund earnings in relation to a superannuation lump sum under section 305-75 of the ITAA 1997, the correct rule for translating foreign currency into Australian dollars is the rule described in Item 11A of the table in subsection 960-50(6) of the ITAA 1997 (as modified by regulation 960-50.01(1) of the Income Tax Assessment (1997 Act) Regulations 2021).

This means 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 directly by you or your complying superannuation fund. Specifically, under subsection 960-50(4) of the ITAA 1997, each amount or component that is denoted in a foreign currency must be translated into an Australian dollar equivalent first before any calculations are undertaken.

First transfer

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 Euro are translated into Australian dollars using the exchange rate applicable on the date of receipt. In this case the relevant exchange rate was AUD $1 = Foreign currencyXXX.

Subsection 305-70(2) of the ITAA 1997 states that only so much of the lump sum as equals the applicable fund earnings is included in assessable income. Therefore, the assessable income will be limited to the amount of the lump sum in any case where the lump sum is less than the applicable fund earnings.

The 'applicable fund earnings' amount in respect of the first lump sum payment transferred from the Fund is $XXX.

Final transfer

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 Euro are translated into Australian dollars using the exchange rate applicable on the date of receipt. In this case the relevant exchange rate was AUD $1 = Foreign currencyXXX.

The 'applicable fund earnings' amount in respect of the final lump sum payment transferred from the Fund is nil.