Edited version of private advice

Authorisation Number: 1052284419909

Date of advice: 13 August 2024

Ruling

Subject: Foreign superannuation fund - lump sum payment

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:

Financial year ending 30 June 2023

The scheme commences on:

1 July 2022

Relevant facts and circumstances

You became a resident of Australia for taxation purposes.

While living in a foreign country, you became a member of the foreign fund.

The administrators of the foreign fund are unable to provide the amount in the scheme that was vested in you on the day before you became an Australian resident.

We have provided an estimated value of your benefit in the foreign fund on the day before you became an Australian resident. You agreed with this estimated amount.

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

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

During the 2023 financial year, you received a lump sum payment from the foreign fund into your foreign bank account. The RBA exchange rate on this date was AUD $1 = Foreign currencyXXX.

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

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

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, contributions 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.

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.

Transfer to you

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 pound sterling 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 currencyXXXX.

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