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Edited version of your written advice
Authorisation Number: 1051304478718
Date of advice: 17 January 2018
Subject: Applicable fund earnings
Are the payments received by a person (the Taxpayer) from a foreign pension scheme (the Foreign Fund) assessable as lump sums payments from a foreign superannuation fund under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Will the payments received by the Taxpayer from the Foreign Fund be assessable in Australia?
This ruling applies for the following period:
Income year ending 30 June 20XX
The scheme commenced on
1 July 20XX
Relevant facts and circumstances
The Taxpayer migrated from another country to Australia several years ago.
While living in the other country, the Taxpayer became a member of the Foreign Fund.
The Foreign Fund is established and managed outside Australia.
The rules of the Foreign Fund provide the conditions of withdrawal from the Foreign Fund and state:
Under the Internal Revenue code (IRC), amounts attributable to employee elective deferrals in 403(b) plans cannot be paid to a participant until the participant has a “distributable event” such as disability, severance from employment or the participant reaching age 59½ …
… distributions of certain 403(b) accumulations may be permitted when required to meet the financial burden of a qualifying hardship of benefits and their dependents. Qualifying hardships include medical and tuition expenses, purchases of a primary residence, payments for funeral expenses, expenses relating to major natural catastrophes, and prevention of eviction/foreclosure. …
In the 20XX income year, the Taxpayer received two pension payments from the Foreign Fund.
In the 20XX income year, the Taxpayer was informed by the trustee of the Foreign Fund that the remainder of their benefits in the Foreign Fund would be distributed to them as a number of annual instalments.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 305-B
Income Tax Assessment Act 1997 Subsection 295-95(2)
Income Tax Assessment Act 1997 Section 305--55
Income Tax Assessment Act 1997 Section 305-60
Income Tax Assessment Act 1997 Section 305-65
Income Tax Assessment Act 1997 Section 305-70
Income Tax Assessment Act 1997 Section 305-75
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 6-10(4)
Income Tax Assessment Act 1997 Section 10-5
Income Tax Assessment Act 1936 Section 27H
International Tax Agreements Act 1953
Reasons for decision
The Foreign Fund is not considered a ‘foreign superannuation fund’ for the purposes of Subdivision 305-B of the ITAA 1997. Therefore, section 305-75 of the ITAA 1997 does not apply to payments received by the Taxpayer from the Foreign Fund.
Lump sum payments received from certain foreign superannuation funds
Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation lump sum benefits paid from foreign superannuation funds and schemes for the payment of benefits in the nature of superannuation upon retirement or death.
Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax-free. It is not assessable income and is not exempt income (sections 305-60 and 305-65 of the ITAA 1997).
Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income.
Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund (or scheme for the payment of benefits in the nature of superannuation), section 305-70 of the ITAA 1997 will not apply to the payment.
Meaning of ‘foreign superannuation fund’
A ‘foreign superannuation fund’ is defined in subsection 995-1(1) of the ITAA 1997 as follows:
(a) *superannuation fund is a foreign superannuation fund at a time if the fund is not an *Australian superannuation fund at that time; and
(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.
*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1.
Relevantly, subsection 295-95(2) of the ITAA 1997 defines ‘Australian superannuation fund’ as follows:
A *superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:
(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and
(b) at that time, the central management and control of the fund is ordinarily in Australia; and
(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:
(i) the total *market value of the fund’s assets attributable to *superannuation interests held by active members; or
(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;
is attributable to superannuation interests held by active members who are Australian residents.
*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1.
Thus, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a foreign superannuation fund. The fact that some of its members may be Australian residents would not necessarily alter this.
Meaning of ‘superannuation fund’
‘Superannuation fund’ is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).
Subsection 10(1) of the SISA provides that:
superannuation fund means:
(a) a fund that:
(i) is an indefinitely continuing fund; and
(ii) is a provident, benefit, superannuation or retirement fund; or
(b) a public sector superannuation scheme.
Meaning of ‘provident, benefit, superannuation or retirement fund’
The High Court examined both the terms ‘superannuation fund’ and ‘fund’ in Scott v. Federal Commissioner of Taxation (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:
…I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion “fund”, I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.
The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to exclusively be a ‘provident, benefit or superannuation fund’ and that ‘connoted a purpose narrower than the purpose of conferring benefits in a completely general sense…’. This narrower purpose meant that the benefits had to be ‘characterised by some specific future purpose’.
Furthermore, Justice Kitto’s judgement indicated that a fund does not satisfy any of the three provisions, that is, ‘provident, benefit or superannuation fund’, if there exist provisions for the payment of benefits ‘for any other reason whatsoever’. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.
A similar approach was adopted by Taylor J and Windeyer J who said:
It thus becomes necessary to look carefully and critically at the terms of the trust deed, at what is required and what is permitted – that is to say in what ways the trustees might, without any breach of the trusts it imposes, apply the trust property.
…In other words, if they could, keeping within the terms of the trust, apply the fund or any portion thereof to purposes foreign to the true purposes of such a fund, then it would not be such a fund.
In Baker v FC of T 2015 ATC 10 399; (2015) AATA 469, it was said:
…for a payment to be a payment from a scheme for the payment of benefits in the nature of superannuation upon retirement the scheme would need to provide for payments that have the essential qualities, character or features of payments of superannuation benefits on retirement. Further, the scheme would need to be such that such payments were more than just possibilities among a range of alternatives such as simple withdrawals available at any time.
In addition, under section 62 of the SISA, a regulated superannuation fund must be ‘maintained solely’ for the purposes of providing benefits to a member when the events occur:
● on or after retirement from gainful employment;
● attaining a prescribed age; or
● on the member’s death (this may require the benefits being passed on to a member’s dependants or legal representative).
Notwithstanding the SISA applies only to ‘regulated superannuation funds’ (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and the Superannuation Industry (Supervision) Regulations 1994 (SISR)) as providing guidance as to what ‘benefit’ or ‘specific future purpose’ a superannuation fund should provide.
As reiterated by Justice O’Loughlin in Baker v FC of T 2015 ATC 10-399; (2015) AATA 469 at paragraph 16,
… a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund.
In this case, information available indicates that as well as providing benefits on retirement, invalidity and death, the Foreign Fund also provides benefits for other purposes such as:
● to pay medical costs incurred by the member, their spouse, children and dependents;
● to purchase the member’s home;
● to pay for the higher educational expenses of the member, their spouse, children and dependents; or
● to pay expenses for the repair of damage to the member’s principal residency.
Because the Foreign Fund also provides benefits for non-retirement purposes, it does not meet the definition of superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.
Consequently, Subdivision 305-B of the ITAA 1997 does not apply to any lump sum payments received from the Foreign Fund.
The payments received by the Taxpayer from the Foreign Fund will be taxed in Australia under article 18 of the tax agreement between Australia and the Relevant country and will form part of the assessable income under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income from all sources, whether in or out of Australia.
Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 27H of the ITAA 1936 which provides that annuity amounts are included in the assessable income of the taxpayer.
In determining liability to tax on the foreign sourced income the Taxpayer received it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreement Act 1953 (the Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.
Schedule 2 to the Agreements Act contains the double tax agreement between Australia and the Relevant country. The Relevant country Convention is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Relevant country Convention operates to avoid the double taxation of income received by Australian and the Relevant country.
Paragraph (3) of Article 18 of the Relevant country Convention provides that annuities paid to an individual who is a resident of Australia shall be taxable only in Australia.
Paragraph (5) of Article 18 of the Relevant country Convention defines 'annuities' as stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered).
The annuity received by the Taxpayer from the Foreign Fund comes within the definition of an 'annuity' under paragraph (5) of Article 18 of the Relevant country Convention.
As the Taxpayer is a resident of Australia for income tax purposes, paragraph (3) of Article 18 of the Relevant country Convention applies and the annuity income received from the US will form part of the assessable income under section 27H of the ITAA 1936.
Further issues for you to consider
In Question 1, the Commissioner concludes that the Foreign Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes. Consequently, Subdivision 305-B of the ITAA 1997 would not apply to any lump sum payments received from the Foreign Fund.
Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the ITAA 1936.
Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, the amount is to be included in the assessable income of the beneficiary.
Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection 99B(1) is not to include any amount that represents either:
● the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)
● amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and
● amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936).
Withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from a foreign trust are assessable under subsection 99B(1) of the ITAA 1936.
However, the amount assessable under subsection 99B(1) of the ITAA 1936 does not include amounts listed under subsection 99B(2) of the ITAA 1936.