A taxpayer that migrated to Australia several years ago has recently turned 60 and wishes to “cash out” their foreign superannuation account and repatriate the proceeds back to Australia.
Is the lump sum receivable subject to tax in Australia?
Superannuation benefits paid to a member of a complying superannuation fund are generally tax-free where the recipient is aged 60 or over at the time of receipt.
A foreign superannuation fund will not be a complying fund for this purpose and as such the benefit of the above concession is not available.
However, is the lump sum received simply a capital receipt and not subject to tax in Australia?
A lump sum payment that is received from a foreign superannuation fund is not assessable income and is not exempt income under section 305-60 or section 305-65 ITAA 1997 subject to the passing of the conditions specific to the relevant sections.
Amongst the conditions of section 305-60, the lump sum received must relate to a period:
- when the taxpayer was not an Australian resident; or
- starting after the taxpayer became an Australian resident and ending before the payment is received.
In the present case, any lump sum received by the taxpayer would relate in part to his Australian residence period such that the exemption of section 305-60 is unavailable.
As for the conditions of section 305-65, the taxpayer must be an Australian resident during the period of his/her foreign employment. In the present case, we assume the taxpayer was not a resident of Australia during the period of his foreign employment and as such the exemption of section 305-65 is also unavailable.
As the taxpayer is not a resident of Australia at all times during the period to which the lump sum relates, the assessable part of the lump sum payment would be determined in accordance with subsection 305-75(3) ITAA 1997. Broadly, that subsection seeks to assess a lump sum payment from a foreign superannuation fund insofar as it relates to earnings derived by that superannuation fund whilst the taxpayer is a resident of Australia.
In the context of the taxpayer, the day when he/she first became an Australian tax resident will need to be determined. Accordingly, in order to quantify the assessable part of the aforementioned lump sum payment we would need to:
- ascertain the amount in the foreign fund that was vested in the taxpayer at the time they became an Australian tax resident; and
- any contributions made since then including benefits that have been rolled into the fund from other foreign superannuation funds.
Subsection 305-75(3) applicable fund earnings formula
The applicable fund earnings of a taxpayer who became an Australian resident after the start of the period to which the superannuation lump sum relates (but before they received it) is the amount (not less than zero) worked out as follows:
Step 1: add up:
(a) the amount in the fund that was vested in the taxpayer just before the day (the “start day”) the taxpayer first became an Australian resident during the period);
(b) the part that is attributable to contributions made by or for the taxpayer during the remainder of the period); and
(c) the part that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the remainder of the period).
Step 2: subtract that total amount from the amount in the fund that was vested in the taxpayer when the lump sum was paid (with no deduction for foreign tax).
Step 3: multiply the resulting amount by the proportion of the total days during the period when the taxpayer was an Australian resident.
Step 4: add the total of all “previously exempt fund earnings” covered by s 305-75(5) and (6). This is the amount that would have been included in the taxpayer’s assessable income under s 305-70(2) but for s 305-74, which states that any part of the lump sum that is paid into another foreign superannuation fund is not assessable income and not exempt income.
Transferred amount where member has made a choice under section 305-80 ITAA 1997
If a taxpayer is to receive a superannuation lump sum from a foreign superannuation fund more than 6 months after Australian residency commences or foreign employment terminates, the taxpayer may choose that the lump sum be paid into a complying superannuation fund and that all or part of the applicable fund earnings be included in the assessable income of the fund – refer section 305-80ITAA 1997.
The fund is then assessable on the amount specified in the taxpayer’s choice. The amount is included in income in the year in which the transfer occurs and tax is paid at the relevant super fund rate of 15% as opposed to the individual’s marginal tax rate.
There are some specific rules that apply to this choice. Further, the ability of the foreign fund to pay the lump sum to an Australian complying superannuation entity must first be checked so that any relevant foreign jurisdiction requirements are satisfied.