Offshore superannuation schemes had the following characteristics.
The fund is a non-resident and non-complying fund with central management and control maintained overseas. It has no branches or permanent establishments in Australia and has no intention of establishing any.
Participating employer maintains portfolios. Contributions are made by an employer (or an associate) to the fund in respect of employees who are nominated by the employer for membership.
Membership is typically obtained only after a series of transactions. For example, the trustee invites the employee to make an application for membership, the employee applies and the trustee accepts the application.
Employee member entitlements under the terms of the fund may either be fixed or discretionary. Where the employee’s entitlement is fixed, employer contributions are not allocated to an individual employee’s account until the employee becomes a member of the fund. Where the employee’s entitlement is discretionary, the contribution remains unallocated until the employee is entitled to receive it. Where employee membership is contingent upon the employee making a contribution to the fund, that contribution is usually financed by a limited recourse loan from the fund and both the contribution and the loan is offset against each other when they become repayable. Any interest on the contribution and loan (which is typically charged at the fringe benefits tax rate) is also offset against each other.
Example: offshore superannuation arrangement with fixed class members
The fund is a non-resident non-complying superannuation fund.
The employer (or associate) makes contributions to the fund, and a deduction is claimed for that contribution under section 82AAE.
Employer contributions are not allocated to individual employees is admitted as a member of the fund.
Employees become members only after the trustee invites them to apply for membership, the employee applies, the trustee accepts the application and the employee makes a contribution to the fund.
The employee's contribution is financed by a limited recourse loan from the fund, and both the contribution and the loan will be offset against each other at the time of repayment. Any interest on the contribution (charged at the FBT rate) and the loan will also be offset against each other.
Non-complying funds that generate tax concessions even greater than those provided to complying funds by Parliament create a tax mischief as these funds avoid contributions tax and surcharge even though there is a clear policy intent on what must be paid.
The taxpayers legal perspective
The concessions claimed include deductibility of the contributions, no tax or surcharge in the hands of the fund, no age-based limits, no impact from reasonable benefits limits and no FBT liability. The end benefit is said to be tax free on withdrawal at any time. In extreme examples, any amount of income can be completely washed of tax.
Our legal perspective
The Commissioner’s view is that, depending on the facts, one or more of the following applies:
deductions under section 82AAE for an employer’s contribution is not allowed
deductions under sub-section 51(1) of the Income Tax Assessment Act 1936 or section 8–1 of the Income Tax Assessment Act 1997 for the interest expense (if any) incurred by the employer in relation to a loan to finance a contribution is not allowed
deductions under sub-section 51(1) of the Income Tax Assessment Act 1936, or section 25–5 or section 8–1 of the Income Tax Assessment Act 1997 for advisors’ fees in relation to the offshore superannuation scheme are not allowable
the trustee will not be exempt from Australian tax on a contribution, and the contribution to the superannuation fund will constitute a taxable contribution, as defined in section 274 of the Income Tax Assessment Act 1936
section 108, section 109 and/or Division 7A applies to deem a contribution or loan a dividend from the employer if the employee is a shareholder (or an associate of a shareholder)
each contribution was capital or of a capital nature
Part X of the controlled foreign companies provisions applies to fund members
the foreign investment fund provisions of Part XI will apply to fund members
the non-resident trust provisions of Subdivision D of Division 6AAA of Part III will apply to participating employers and/or fund members to include the attributable income of the fund in their assessable income
there will be application of the trust accrual provisions
Part IVA may be applied to the arrangement, and
fringe benefit tax applies when the contribution amounts are allocated to the employees.
Case decisions
Cameron Brae On 21 August 2007, the Full Federal Court handed down its judgment in a case concerning payments to a New Zealand resident superannuation fund. The Court held that the payments were not deductible because they were not made for the sole purpose of making provision for superannuation benefits for employees of the payer company. The Court also held that the payments were not deductible because the payment was an outgoing of a capital nature.
Walstern Federal Court denied deductions for contributions made by a company to a New Zealand based superannuation fund on behalf of its owners who were also its sole employees. The Court agreed with the Tax Office that the sole purpose of the contribution was not to provide superannuation benefits to persons who were employees. It also held that the fringe benefits tax (FBT) applied in respect of the contributions at the time the amounts contributed were allocated by the fund to the employee owners
The legislation was amended in 2000 so that there is no doubt that offshore superannuation schemes are no longer effective. If you were a participant in an offshore superannuation scheme you should contact the Tax Office on 1800 177 006 for advice about entering a settlement agreement.
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