Edited version of private advice

Authorisation Number: 1052312221566

Date of advice: 3 October 2024

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

Year ending 30 June 2024

The scheme commenced on

1 July 2023

Relevant facts and circumstances

The Taxpayer became a resident of Australia for taxation purposes on XX XXX XXXX (residency date).

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

The Taxpayer was only able to access their superannuation benefits from the foreign fund upon their retirement.

The Taxpayer provided documentation to support the value of policy vested in the Taxpayer on the date before the residency date.

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

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

The Taxpayer provided evidence that the foreign fund paid a lump sum payment into their foreign bank account for $XX,XXX.XX on XX XXXX XXXX.

The Australian Reserve Bank daily exchange rate on XX XXXX XXXX was AUD$1 = 0.XXXX on the date the foreign lump sum was paid into the Taxpayer's foreign 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 960-50

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

Income Tax Assessment (1997 Act) Regulations 2021 Regulation 960-50.01(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 ATO ID 2015/7: Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997

Detailed reasoning

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.

For subsection 305-75(2) and subsection 305-75(3) of the ITAA 1997, the period to which the lump sum relates is the period during which funds are accumulated in a particular foreign superannuation fund for a member that has a relation to the superannuation lump sum paid by that fund. That is consistent with other parts of those subsections, which also focus on the foreign superannuation fund from which the lump sum is paid.

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

(ii)            the day when you became a member of the fund (the start day);

(iii)            the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any

(iv)            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 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 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 remainder of 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).

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 Australia

As the taxpayer became a member of the foreign fund before they became a resident of Australia, the applicable fund earnings on this lump sum will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

Any amounts in foreign currency 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 = 0.xxx.

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