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Edited version of your written advice
Authorisation Number: 1051499651490
Date of advice: 12 April 2019
Subject: Assessability of a lump sum payment from an overseas retirement fund
Is the lump sum income received from a Country Y based retirement fund assessable income in Australia?
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
You are an Australian resident for tax purposes.
You became a resident of Australia for tax purposes in the 20XX-XX financial year.
Prior to migrating to Australia, you lived in Country Y where you became a member of Fund Z in 20XX.
The last deposit to the fund was made in 20XX.
Relevantly, Country Y Fund’s policy document contains the following withdrawal conditions:
A Roth IRA is a retirement account that allows your contributions and earnings to grow tax-deferred, regardless of your age. While contributions are not tax-deductible, you can take withdrawals at any time without incurring federal income taxes or penalties.
The first withdrawal from the fund occurred late 20XX.
You received other foreign sourced income which places you over the tax free threshold in Australia.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 99B
Income Tax Assessment Act 1936 subsection 99B(1)
Income Tax Assessment Act 1936 subsection 99B(2)
Income Tax Assessment Act 1936 subsection 160AF(1)
Income Tax Assessment Act 1936 subsection 160AFE
Income Tax Assessment Act 1997 subsection 6-5(2)
Income Tax Assessment Act 1997 subsection 6-10(4)
Income Tax Assessment Act 1997 subsection 6-10(2)
Income Tax Assessment Act 1997 section 10-5
Income Tax Assessment Act 1997 subsection 295-95(2)
Income Tax Assessment Act 1997 Subdivision 305-B
Income Tax Assessment Act 1997 section 305-70
Income Tax Assessment Act 1997 section 305-60
Income Tax Assessment Act 1997 section 770-10
Income Tax Assessment Act 1997 subsection 770-70
Income Tax Assessment Act 1997 subsection 995-1(1)
Superannuation Industry (Supervision) Act 1993 section 19
Superannuation Industry (Supervision) Act 1993 section 62
Reasons for decision
Lump sum payments from foreign superannuation funds
Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the tax treatment of superannuation benefits paid from certain foreign superannuation funds.
In accordance with section 305-60 of the ITAA 1997, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income.
If a person received a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person’s assessable income.
Meaning of ‘foreign superannuation fund’
A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:
(a) a superannuation fund is a foreign superannuation fund at a time if the fund if not an Australian superannuation fund at the 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.
Relevantly, subsection 295-95(2) of the ITAA 1997 defines an ‘Australian superannuation fund’ as follows:
A superannuation fund is an Australian superannuation fund at a time, and for an 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 Australian; and…
Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would not qualify as an Australian superannuation fund and would therefore be a ‘foreign superannuation fund’ in accordance with subsection 995-1(1) of the ITAA 1997.
Meaning of ‘superannuation fund’
Subsection 995-1(1) of the ITAA 1997 defines a ‘superannuation fund’ as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Regulations 1994 (SISA), that is:
(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’.
The High Court examined both the terms superannuation fund and fund in Scott v. Commissioner of Taxation of the Commonwealth (No.2) (1966) 10 AITR 290; (1966) 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 benefits of its employees except that it must be 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 Mahoney v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahoney). 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’ such as the example given by Justice Kitto of a funeral benefit.
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.
In section 62 of the SISA, a regulated superannuation fund must be ‘maintained solely’ for the ‘core purposes’ of providing benefits to a member when the events occur:
● on or after retirement from gainful employment; or
● attaining a prescribed age; and
● 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) as providing guidance as to what ‘benefit’ or ‘specific future purpose’ a superannuation fund should provide.
In view of the legislation and the decisions made in Scott and Mahoney, the Commissioner’s view is that for a fund to be classified as a superannuation fund, it must be exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual as specified under the SISA.
The information provided indicates that you could access your benefits in Fund Z for pre-retirement purposes. For example, a member may withdraw their after-tax contributions from their account at any time, for any reason.
It is considered that Fund Z does not ultimately provide the narrow range of benefits required by the definition of a superannuation fund.
Further, as the benefits in Fund Z can be accessed for pre-retirement purposes, Fund Z does not meet the ‘sole purpose test’ and therefore cannot be considered a ‘superannuation fund’ for the purposes of subsection 10(1) of the SISA.
Therefore, on the basis of the information provided, any payments made from Fund Z will not be considered to be paid from a ‘foreign superannuation fund’ as defined in subsection 995-1(1) of the ITAA 1997.
The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the ITAA 1997).
Your withdrawal from your Fund Z account would not be ordinary income (subsection 6-5(2) of the ITAA 1997).
‘Statutory income’ is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997).
Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with receipt of trust income not previously subject to tax.
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, that 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 (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).
Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).
In your case, the withdrawn amounts are a distribution from a trust, any amounts distributed (withdrawn) or credited from Fund Z are assessable under subsection 99B(1) of the ITAA 1936.
Any distribution from the fund is assessable in your hands subject to the exclusions under subsection 99B(2) of the ITAA 1936.
The foreign tax credits - 2008 and earlier income years
For the 2008 and earlier income years, subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of:
● the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or
● the amount of Australian tax payable in respect of the foreign income.
Where the foreign tax paid is greater than the Australian tax payable, a taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess foreign tax paid.
However under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any tax payable on foreign income earned in the future.
Foreign income tax offset (FITO) - from 1 July 2008
From 1 July 2008 the foreign tax credit system was replaced by the foreign income tax offset system.
A foreign income tax offset is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.
Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.
When claiming a FITO, you are required to gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income.
The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997).
The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source.
If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap.
In your case, you are entitled to FITO for any income tax withheld from your income in Fund Z limited to the amount to which you are entitled under section 770-10 of the ITAA 1997.