Edited version of private advice

Authorisation Number: 1052322387591

Date of advice: 23 October 2024

Ruling

Subject: Foreign lump sum payment

Question 1

Is the Fund a foreign superannuation fund as defined in section 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is any part of a lump sum payment to you from the Fund, applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2025

Relevant facts and circumstances

You became an Australian resident in 20XX.

While working in Country XX, you were employed by XXXX. Your employer provided a defined benefit pension scheme (the Fund).

Your employer provided an old age pension that you would become eligible for when you attained the age of 60.

The old age pension could be taken as a life-time income amount or as a lump sum under the pension regulations of the Fund.

You converted the full amount of your monthly pension entitlement from the Fund to a lump sum.

The relevant calculation date of the lump sum pension amount was XXXX, upon reaching the age of 60. As prescribed in the Pension Regulations of the Fund, the lump sum was paid into a German bank account in your name.

The lump sum amount was XXXX Euro received on XXXX.

The amount of AUD XXXX was transferred into your Australian bank account.

A letter from the Fund confirmed that you applied for the retirement benefit in the form of a one-off lump sum payment. At the time of the payment on XXXX your vested monthly entitlement was converted into a lump sum based on the age of 60 and paid out. The vested monthly entitlement calculated at that time did not change until you reached the age of 60.

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

Reasons for decision

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

When a person receives a lump sum from a foreign superannuation fund more than six months after they became an Australian resident, the growth they earned 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.

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 meets the definition of a foreign superannuation fund.

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

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 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).

In this case, you provided a letter from the Fund stating that your vested monthly pension entitlement value had not changed since it was calculated when you left your employment with the foreign employer. As there was no change in the value of your vested monthly pension entitlement from the day before you became a resident of Australia to the date the monthly pension (converted to a lump sum payment) was paid to you, the 'applicable fund earnings' amount in respect of the lump sum payment transferred from the Fund is Nil.