Edited version of private advice

Authorisation Number: 5010096886256

Date of advice: 23 April 2024

Ruling

Subject: Foreign lump sum payment

Question 1

Is the Plan 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 Plan applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

Whilst residing in Country A, you became a member of the Plan.

A member must be at least of early retirement age to enter the Plan.

The governing rules of the Plan primarily allow a member to withdraw their benefits on retirement, death or shortened life.

You became an Australian resident in 20YY.

The value of your benefits in the Plan on residency date were $xxx.

The gross amount paid from the Plan was Country A $xxx.

You paid a 15% non-resident tax of Country A $xxx.

On becoming a resident of Australia, a payment of AUD $xxx was deposited into your Commonwealth Australia Bank account in 20YY. The exchange rate was AUD $1 = Country A $0.xxxx.

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

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 your Plan 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).

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 you became a member of Plan before you 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 Country A dollars 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 = Country A $0.xxx.

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