Private ruling: Superannuation death benefit- applicable fund earnings
Date of advice: 7 March 2017
Published: August 2017
Ruling period: Income year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is a superannuation death benefit paid from the foreign fund assessable to the resident trustee of the deceased estate? | A1: Yes | Q2: Is any part of the lump sum payment from the foreign fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes

Relevant facts and circumstances: The Deceased became a resident of Australia for income tax purposes on a date in the 200A-0B income year (the residency date). The Deceased died in the 201C-1D income year. The Deceased had a deferred pension entitlement in a foreign superannuation fund (The Plan) providing a lifetime pension for members at retirement age, as well as ancillary death benefits. In late 201D a resident administrator was appointed as the administrator of the estate of The Deceased (the Estate). The Beneficiary of the Estate is a non-resident. Benefits in The Plan cannot be accessed other than at retirement, death, or invalidity. No contributions had been made into The Plan by the Deceased or anyone on behalf of the Deceased since the Deceased's residency date. There were no transfers from foreign superannuation funds into The Plan. There are no previously exempt fund earnings. A lump sum death benefit was paid by The Plan to the Estate in the 201E-1F income year. The value of the Deceased's interest in The Plan at residency date was calculated in accordance with documentation provided.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Section 305-75 | Income Tax Assessment Act 1997 Subsection 305-75(2) | Income Tax Assessment Act 1997 Subsection 305-75(3) | Income Tax Assessment Act 1997 Section 307-5 | Income Tax Assessment Act 1997 Subsection 307-5(1) | Income Tax Assessment Act 1997 Subsection 307-5(4) | Income Tax Assessment Act 1997 Section 307-65 | Income Tax Assessment Act 1997 Section 307-70 | Income Tax Assessment Act 1997 Section 960-50 | Income Tax Assessment Act 1997 Subsection 960-50(1) | Income Tax Assessment Act 1997 Subsection 960-50(4) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Act 1936 Subsection 101A(1) | Superannuation Industry (Supervision) Act 1993 Section 42 All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision: Summary: A portion of the lump sum payment transferred from the foreign fund to the Estate must be included as 'applicable fund earnings' in the income tax return of the Estate for the 201E-1F income year. The assessable applicable fund earnings are calculated in accordance with section 305-75. | Detailed Reasoning - Superannuation death benefits paid to the trustee of a deceased estate: Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997. A superannuation death benefit is defined in subsection 307-5(4) as being a payment described in Column 3 of the table in subsection 307-5(1). A superannuation death benefit is described in Column 3 of Item 1 of the table in subsection 307-5(1) as: … A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. A superannuation death benefit must be paid as either: ● a superannuation lump sum; or ● a superannuation income stream. A superannuation lump sum is described in section 307-65 as a superannuation benefit that is not a superannuation income stream as defined in section 307-70. The Deceased died in the 201C-1D income year. A superannuation death benefit was paid by The Plan to the Deceased's Estate in the 201E-1F income year. The benefit was made to the Deceased's Estate during the 201E-1F income year from The Plan, (a foreign superannuation fund), after the Deceased's death, because the Deceased was a member of The Plan. Hence, this payment is a superannuation benefit within the meaning of Column 3 of Item 1 of the table in subsection 307-5(1). This benefit is a superannuation death benefit as defined in subsection 307-5(4). The superannuation benefit is a superannuation lump sum within the meaning of section 307-65. Division 302 sets out the tax treatment of superannuation death benefits paid from complying plans. A complying superannuation entity as defined in subsection 995-1(1) includes a complying superannuation fund. In this case, as The Plan is not a complying superannuation fund (that is, it is not a resident regulated superannuation fund at all times during the year of income; as per section 42 of the Superannuation Industry (Supervision) Act 1993 ), Division 302 has no application in this case. Under subsection 101A(1) of the Income Tax Assessment Act 1936 , if the trustee of a deceased person receives any amount which would have been assessable in the hands of the deceased person if it had been received by him or her during his or her lifetime, that amount shall be included in the assessable income of that year of the trust estate and shall be deemed to be income to which no beneficiary is presently entitled. In this case, had the Deceased received the superannuation lump sum from the foreign superannuation fund during his lifetime, Division 305 (which deals with superannuation benefits paid from non-complying superannuation funds) would have applied to calculate an amount, if any, of applicable fund earnings. | Detailed Reasoning - Superannuation benefits from non-complying superannuation funds: Where a superannuation lump sum is received from a foreign superannuation fund, Subdivision 305-B will apply. Relevantly, section 305-75 provides that an amount of applicable fund earnings will need to be calculated in relation to a lump sum received from a foreign superannuation fund. | Detailed Reasoning - Applicable fund earnings: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received more than six months after a person has become an Australian resident, will be assessable under section 305-70. The applicable fund earnings is worked out under either subsection 305-75(2) or 305-75(3). Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person was not an Australian resident at all times during the period to which the lump sum relates. The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income. In this case, as the Deceased was not a resident at all times during the period to which the lump sum relates, any amount of applicable fund earnings will be calculated in accordance with subsection 305-75(3). Subsection 305-75(3) states: If you become an Australian resident after the start of 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 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 overall effect of section 305-75 is that an entity will be assessed on the sum of: ● the total growth they earned on their benefits in a foreign superannuation fund during the period between the start day and the date when the lump sum is paid; and ● any previously exempt fund earnings. | Detailed Reasoning - Foreign currency conversion: Subsection 960-50(1) states that an amount in a foreign currency is to be translated into Australian dollars. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 to amounts that are elements in the calculation of another amount, you need to: ● first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and ● then, calculate the other amounts. For the purposes of section 305-70 the 'applicable fund earnings' should be calculated by: ● translating the amount of the superannuation lump sum received from the foreign fund to Australian currency at the exchange rate applicable on the day of receipt; and ● deducting from this amount, the amount in the fund that was vested in the member just before they became an Australian resident and the part of the lump sum that is attributable to contributions and amounts transferred into the fund from any other foreign superannuation fund at the exchange rate applicable on the day of receipt of the lump sum. In this case, an amount representing the growth in The Plan has been calculated in accordance with subsection 305-75(3). Therefore, that amount, the 'applicable fund earnings' amount, in respect of the lump sum payment transferred from The Plan to the Estate should be included in the assessable income of the Estate for the 201E-1F income year.