Private ruling: Applicable fund earnings
Date of advice: 22 August 2024
Published: 30 September 2024
Ruling period: 1 July 2022 to 30 June 2023

Ruling: Q1: Is any part of the lump sum payment received from the Country A Fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: 1. You became a resident of Australia for taxation purposes. 2. While living in the Country A, you became a member of the Country A Fund, which was a defined benefit scheme. 3. The administrators of the Country A Fund have provided the value of the standard lump sum and pension benefits vested in you on residency date and the date the lump sum payment was to be made to you. 4. The lump sum amount you received was the maximum lump sum option available to you and differed from the standard lump sum option. Discounting your benefits growth percentage to the lump sum payment, it is estimated that the lump sum was valued at xxx at residency date. 5. There have been no contributions into the Country A Fund since you became an Australian resident for tax purposes. 6. There have been no transfers into the Country A Fund since you became an Australian resident for tax purposes.

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

Reasons for decision: Summary: 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). | Detailed Reasoning - 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. | Detailed Reasoning - Transfer: Country A Fund to you: As you became a member of the Country A Fund 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 foreign currency dollars are translated into Australian dollars using the exchange rate applicable on the date of receipt of the relevant superannuation lump sum directly by you. In this case the relevant exchange rate was A$1 = Foreign currencyxxxx. You should include your applicable fund earnings of $XXXX (calculated as shown in the table below) in your assessable income for the 2023 income year. Table 1: You should include your applicable fund earnings of $XXXX (calculated as shown in the table below) in your assessable income for the 2023 income year. | Detailed Reasoning - A: Amount in fund vested in the taxpayer on the day just before the residency date xxxx xxxx | Detailed Reasoning - B: Part of the payment attributable to contributions to the fund during the remainder of the period 0 0 | Detailed Reasoning - C: Part of the payment attributable to amounts transferred into the fund from any other foreign superannuation funds during the remainder of the period 0 0 | Detailed Reasoning - A + B + C: (The step outlined in paragraph 305-75(3)(a) of the ITAA 1997) xxxx xxxx | Detailed Reasoning - E: Amount in the fund vested in the taxpayer when the lump sum was paid xxxx xxxx | Detailed Reasoning - E - D: (The step outlined in paragraph 305-75(3)(b)) xxxx xxxx | Detailed Reasoning - G: The proportion of the total days during the period of which the taxpayer was an Australian resident for tax purposes. 1 1 | Detailed Reasoning - H: Previously exempt fund earnings (if any) 0 $0 | Detailed Reasoning - I: F x G + H = Applicable Fund Earnings (as future previously exempt fund earnings) xxxx xxxx