Private ruling: Lump sum death benefit payment
Date of advice: 31 October 2022
Published: 16 January 2023
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of the death benefit lump sum payment received from the UK Fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (1TAA 1997)? | A1: Yes

Relevant facts and circumstances: The Deceased was your spouse. The Deceased was a member of a United Kingdom (UK) pension scheme (UK Fund). The UK Fund does not allow for access of benefits prior to retirement age. The Deceased became an Australian resident for tax purposes. A death benefit payment was paid to you. No contributions were made to the UK after the Deceased became a resident of Australia. Foreign fund transfers were made into the UK Fund prior to the Deceased becoming an Australian resident. You were born in Australia and have been an Australian resident at all times.

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 307-5 | Income Tax Assessment Act 1997 section 307-65 | Income Tax Assessment Act 1997 section960-50

Reasons for decision: Summary: A death benefit payment made by a superannuation fund is tax-free in Australia only when it is paid: • by a complying Australian superannuation fund, and • to a dependant of the deceased. In this case, the fund paying the death benefit is a foreign fund. Foreign funds are not regulated in Australia, and so cannot be a complying fund. Consequently, the payment is not tax-free in Australia, even though it is not subject to tax in the UK. Such payments are, however, taxable in Australia under section 305-70 of the ITAA 1997. | Detailed Reasoning - Death benefit - applicable fund earnings: Your inherited benefits from the UK Fund have been transferred to you in Australia. Section 307-65 of the ITAA 1997 defines a superannuation lump sum as a superannuation benefit that is not a superannuation income stream benefit. Section 307-5 includes in the definition of a superannuation benefit a payment to a taxpayer from a superannuation fund, after another person's death, because the other person was a member of the fund. Your benefit paid by the UK Fund is a superannuation lump sum. 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. The applicable fund earnings are the amount worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. The "you" first appearing in these subsections is the death benefit recipient. Consequently, where the death benefit recipient was an Australian resident for the whole of the period to which the lump sum relates subsection 305-75(2) of the ITAA 1997 applies, and where the death benefit recipient became a resident during that period subsection 305-75(3) applies. The period of Australian residence of the deceased fund member is not relevant in determining which subsection applies. In this case, the Deceased's interest in the UK Fund to which the lump sum relates, was established when you were an Australian resident. As you were an Australian resident for the whole of the period to which the lump sum relates subsection 305-75(2) of the ITAA 1997 will apply. 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). In the situation of death benefit payments some of the references to "you" and "your" in the legislation, which literally refer to the death benefit recipient, must be interpreted as referring to the deceased fund member, in order to avoid anomalous results in applying the methods in section 305-75 of the ITAA 1997. For the purposes of subparagraphs 305-75(2)(a)(i) and (ii) of the ITAA 1997, we are concerned with the amount of contributions and foreign fund transfers into the UK Fund, by or for the benefit of the Deceased, after you first became a resident. Paragraph 305-75(2)(c) of the ITAA 1997 requires you to "add the total of all your previously exempt fund earnings (if any)". This must be interpreted as if the amount of previous exempt fund earnings of the Deceased fund member are the previous exempt fund earnings of the death benefit recipient (you). As the Deceased does not have any previously exempt fund earnings, there is no amount to be included in the calculation of your applicable fund earnings when you receive your lump sum payment from the UK Fund. | Detailed Reasoning - Foreign currency conversion: Subsection 960-50(1) of the ITAA 1997 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) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 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 working out the "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 AUD is the rule described in Item 11A of the table in subsection 960-50(6) of the ITAA 1997. In the circumstances of this case, each amount in a foreign currency that is an element in the calculation of the Taxpayer's "applicable fund earnings" is to be translated to AUD at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. | Detailed Reasoning - Calculation of the applicable fund earnings amount: As the Deceased became a member of the Fund when you were a resident of Australia, the growth in the fund will be worked out in accordance with subsection 305-75(2) of the ITAA 1997. The calculation of the applicable fund earnings for your client is shown in the tables below with reference to the facts of the case. Any amounts in pound sterling are translated into Australian dollars using the exchange rate applicable on the day of receipt from the UK Fund. | Detailed Reasoning - A: Part of the lump sum attributable to contributions to the UK Fund £pound;0 | Detailed Reasoning - B: Part of the lump sum attributable to amounts transferred from foreign funds into the UK Fund £pound;0 | Detailed Reasoning - A + B: (The step outlined in paragraph 305-75(2)(a) of the ITAA 1997) £pound;0 | Detailed Reasoning - D: Amount in the UK Fund vested in your client when the lump sum was paid £pound;xxx $xxx | Detailed Reasoning - E − D: (The step outlined in paragraph 305-75(2)(b) of the ITAA 1997) £pound;xxx $xxx | Detailed Reasoning - G: The proportion of the total days during the period from the residency date to the date of receipt, of which the taxpayer was an Australian resident 100% | Detailed Reasoning - H: Previously exempt fund earnings (if any) £pound;0 $0 | Detailed Reasoning - I: Applicable fund earnings = (F × G) + H £pound;xxx | Detailed Reasoning - $xxx: The 'applicable fund earnings' amount in respect of the lump sum payment transferred from the UK Fund that should be included in your assessable income for the 20XX-XX income year is $XX.