Edited version of private ruling

Authorisation Number: 1011565932960

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Ruling

Subject: Foreign lump sum payment

Question 1

Is any part of the lump sum payment from a foreign fund assessable to you under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

No

Question 2

Can you contribute your entitlements from a foreign fund to an Australian complying superannuation fund?

Advice/Answers

The Commissioner declines to rule

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You left Australia to work overseas on an assignment for your employer.

Whilst overseas you established a foreign fund (the fund).

You contributed an amount yearly from your pre-tax income into the fund whilst you were overseas.

No contributions were made by your employer.

You completed the assignment for your employer and returned to Australia.

During the time you were overseas you remained an Australian citizen. You have never attempted to become a resident overseas.

Since returning to Australia you were not able to make additional contributions to the fund.

You are now eligible to withdraw an amount from the fund.

The sole beneficiary of the fund in your absence is your partner.

No withdrawals have been made from the fund since it was established.

In the 2010-11 income year you propose to

· close the fund and transfer the balance into an Australian superannuation fund as an undeducted contribution, or

· close the fund and transfer the balance to a bank account outside of superannuation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-15

Income Tax Assessment Act 1997 Subsection 292-20(2)

Income Tax Assessment Act 1997 Paragraph 292-20(2)(c)

Income Tax Assessment Act 1997 Section 292-80

Income Tax Assessment Act 1997 Subsection 292-85(2)

Income Tax Assessment Act 1997 Subsection 292-95(2)

Income Tax Assessment Act 1997 Section 292-410

Income Tax Assessment Act 1997 Section 307-70

Income Tax Assessment Act 1997 Subsection 307-70(2)

Income Tax Assessment Act 1997 Subsection 307-75(2)

Income Tax Assessment Act 1997 Subsection 307-75(3)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax (Transitional Provisions) Act 1997 Subsection 292-20(2)

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 4

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 5

Superannuation (Excess Non-concessional Contributions Tax) Act 2006 Section 4

Superannuation (Excess Non-concessional Contributions Tax) Act 2006 Section 5

Taxation Administration Act 1953 Division 359 of Schedule 1

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.03(1)

Superannuation Industry (Supervision) Regulations 1994 Regulation 7.04

Superannuation Industry (Supervision) Regulations 1994 Subregulation 7.04(1)

Reasons for decision

Issue

Question 1

Summary

The fund is not a foreign superannuation fund.

The lump sum from the fund is assessable to you to the extent that it has not been previously assessed under the foreign investment funds (FIF) measures. In addition, you are entitled to a foreign income tax offset for the foreign tax you have paid.

Detailed reasoning

Lump sum payments from foreign superannuation funds:

Where a person receives a lump sum payment from a foreign superannuation fund more than six months after the person became a resident of Australia, section 305-70 of the ITAA 1997 will operate to include the applicable fund earnings in the person's assessable income.

The applicable fund earnings are the amount worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

However, before determining whether an amount is assessable under subsection 305-70(2) 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 then subsection 305-70(2) of the ITAA 1997 will not have any application.

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 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.

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 funds 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.

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.

Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), 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;

There is no definition for the phrase provident, benefit, superannuation or retirement fund in either the ITAA 1997, the Income Tax Assessment Act 1936 (ITAA 1936) or the SIS Act. However, the phrase provident, benefit and superannuation fund established for the benefit of employees was considered by Justice Kitto of the High Court in Mahony v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

Justice Kitto referred to each of the three terms separately and said:

Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words provident, benefit and superannuation must be taken to have connoted a purpose narrower than the purpose of conferring benefits in a completely general sense, upon employees. All that need to be recognised is that just as provident and superannuation both referred to the provision of a particular kind of benefit so benefit must have meant a benefit, not in the general sense, but characterised by some specific future purpose.

Justice Kitto in Mahony referred to superannuation as the making of provision for financial support for an employee, or for the employee's estate or dependants, to arise on the employee's retirement, death or other cessation of employment (for example, termination or resignation).

Furthermore, the view that a superannuation fund needs to be for exclusive purposes is highlighted in Justice Kitto's judgement that the fund did not satisfy any of the three provisions, that is, provident, benefit or superannuation fund, as there existed provisions for the payment of benefits for any other reason whatsoever. In other words, though the fund contained provisions for retirement purposes, it could not be accepted as a superannuation fund in that it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

The view that a superannuation fund should be established for the sole purpose of providing superannuation benefits on retirement is also supported in the High Court decision Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v. Federal Commissioner of Taxation (No 2) (1966) 10 AITR 290; (1966) 14 ATD 333; 40 ALJR 265 (Scott). Justice Windeyer said:

... 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.

The Commissioner of Taxation's view is that a fund, to be classified as a superannuation fund, must exclusively provide a narrow range of benefits that are characterised by some specific future purpose, that is, the payment of superannuation benefits upon retirement or death of the individual or as specified under the SIS legislation.

In section 62 of the SIS Act, a regulated superannuation fund must be maintained solely for the core purposes of providing benefits to a member when the following events occur:

(i) on or after retirement from gainful employment; or

(ii) attaining a prescribed age; and

(iii) on the members death. (This may require the benefits being passed on to a members dependants or legal representative.)

Provided a regulated superannuation fund is maintained for one or more of the core purposes, section 62 of the SIS Act also allows a superannuation fund to provide benefits for 'ancillary purposes'. 'Ancillary purposes' cover benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age. As indicated, 'ancillary purposes' does not relate to general or non-retirement purposes such as education, home purchases, medical expenses et cetera.

It is noted that the fund does not qualify as a regulated superannuation fund, as it was established and operates outside Australia, and the SIS legislation applies only to regulated superannuation funds, as defined in section 19 of the SIS Act. Nevertheless, the Commissioner views the SIS legislation as providing guidance as to what benefit or specific future purpose a superannuation fund should provide.

A member's entitlement in the fund can be withdrawn at any time. Although an additional tax may apply if a member withdraws or uses the fund's assets before attaining retirement age there are several exceptions to this rule.

The fund may be used for purposes other than for retirement and it is considered that entitlements in the fund have not been set aside for purposes of the kind outlined in section 62 of the SIS Act. Accordingly, the fund does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance.

Further, it has determined that the lump sum from the fund is assessable to you to the extent that it has not been previously assessed under the FIF measures. In addition, you are entitled to a foreign income tax offset for the foreign tax you have paid.

Contributions to a fund are classified as either concessional or non-concessional contributions. Concessional and non-concessional contributions are explained below.

Limits on concessional contributions

Concessional contributions are contributions made in respect of a person in the financial year to a complying superannuation plan and included in the assessable income of the superannuation provider. Concessional contributions include employer contributions, salary sacrifice contributions and personal contributions claimed as a tax deduction by a self-employed person.

From 1 July 2007, concessional contributions made to superannuation funds are subject to an annual cap. The concessional contributions cap will be indexed to upward movements of average weekly ordinary time earnings (AWOTE) in $5,000 increments (subsection 292-20(2) of the ITAA 1997). For the 2010-11 income year the annual cap is $25,000.

A person will be taxed on concessional contributions over the $25,000 cap at a rate of 31.5% (subsection 292-15 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2006).

Between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply. In the 2010-11 income year, the annual cap will be $50,000 for people aged 50 or over. If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap (subsection 292-20(2) of the Income Tax (Transitional Provisions) Act 1997).

If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap.

Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap.

Under paragraph 292-25(2)(c) of the ITAA 1997 the following amounts are excluded from being concessional contributions:

(i) so much of an amount that is transferred to a superannuation fund from a foreign superannuation fund and is included in the assessable income of the fund as a result of a choice made under section 305-80

(ii) an amount that is a roll-over superannuation benefit to the extent that it contains an untaxed element that is not an excess untaxed roll-over amount, and

(ii) a contribution made to a constitutionally protected fund (CPF).

Limits on non-concessional contributions

Non-concessional contributions include:

· personal contributions for which an income tax deduction is not claimed

· contributions a persons spouse makes to their superannuation fund account (spouse contributions), and

· transfers of superannuation benefits from foreign superannuation funds (excluding amounts included in the funds assessable income).

From 1 July 2007, non-concessional contributions made to a complying superannuation fund will be subject to an annual cap (subsection 292-85(2) of the ITAA 1997). For the 2010-11 income year the annual cap is $150,000.

A person will be taxed on non-concessional contributions over the cap at the rate of 46.5% (subsection 292-80 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Non-concessional Contributions Tax) Act 2006). The person will be required to ask their superannuation fund to release an amount that is equal to the tax liability (section 292-410 of the ITAA 1997).

Question 2

For the following reasons we will not be making a private ruling in respect of the questions raised in your application.

Division 359 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that a private ruling is a written statement of the Commissioner's opinion of how a relevant provision applies, or would apply, to a particular entity in relation to a specified scheme.

Provisions that are relevant for rulings are provisions about certain laws administered by the Commissioner. These provisions are the following:

(a) income tax

(b) Medicare levy

(c) fringe benefits tax

(d) franking tax

(e) withholding tax

(f) mining withholding tax

(g) the administration or collection of those taxes

(h) a grant or benefit mentioned in section 8 of the Product Grants and Benefits Administration Act 2000, or the administration or payment of such a grant or benefit.

In this case, you are requesting a ruling on whether you can contribute your entitlements from a foreign fund to an Australian complying superannuation fund.

However, acceptance of superannuation contributions by a superannuation fund does not qualify as a tax law and relate to the application of the SIS Act. This is not a relevant provision for the purposes of the TAA and the Commissioner is unable to rule on the matter that you have raised.

However, the following general advice is provided which, whilst not binding on the Commissioner, the Tax Office will stand by and will not depart from unless:

· the law has changed since the advice was given;

· a final court decision has affected our interpretation of the law since the advice was given; or

· for any reason, the advice is no longer considered appropriate - for example, if commercial practice has changed, the advice has been exploited in an abusive and unintended way or the advice is found on reconsideration to be wrong in law.

Acceptance of contributions

The issue of whether a regulated superannuation fund is able to accept contributions is determined under the SIS Act and the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).

The SIS Act and SIS Regulations are administered by the Commissioner only so far as they relate to self managed superannuation funds (SMSFs). Authority to make decisions under these legislative provisions, as they relate to non-SMSFs, rest with the Australian Prudential Regulation Authority (APRA).

Notwithstanding the above, regulation 7.04 of the SIS Regulations, sets out the circumstances under which a regulated superannuation fund can accept contributions for a member.

Condition for accepting contributions

Subregulation 7.04(1) of the SIS Regulations states:

A regulated superannuation fund may accept contributions only in accordance with the following table and subregulations (2), (3), (4) and (6).

If the member is not under 65, but is under 70, Item 2 of the table states:

Contributions that are made in respect of the member that are:

(a) mandated employer contributions; or

(b) if the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made:

(i) employer contributions (except mandated employer contributions); or

(ii) member contributions

…

Therefore, for a fund to accept a contribution made in respect of a member who has reached the age of 65 but not age 70, the member must be gainfully employed on at least a part-time basis during the financial year in which the contributions are made.

Under subregulation 1.03(1) of the SIS Regulations 'gainfully employed' means:

employed or self employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

In respect of part-time gainful employment, a person must be gainfully employed for at least 10 hours and less than 30 hours each week.

The issue of a fund being able to accept contributions, and the meaning of 'gainfully employed', is also discussed in the APRA Superannuation Circular I.A.1 Contribution and Accrual Standards for Regulated Superannuation Funds. It states in paragraph 21 that:

'Gainfully employed' means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. The concept of 'gain or reward' envisages receipt of remuneration such as salary or wages, business income, bonuses, commissions, fees or gratuities, in return for personal exertion from the above mentioned activities.

As stated in the Circular, a person must be in receipt of remuneration in return for his or her personal exertion to be gainfully employed. It is clear from this comment that passive income such as dividends, interest, pensions, the letting of properties, et cetera would not fall within the meaning of gain or reward. Therefore, receipt of such income would not ordinarily constitute gainful employment.

It should be noted that a fund, given the above circumstances, would be in breach of the SIS requirements if it accepts contributions from a person who was not gainfully employed. Furthermore, the breach could jeopardize the fund's complying status.

It should be further noted that there is no provision in either the SIS Act or the SIS Regulations that allows the Commissioner or APRA to exercise a discretion to ignore the work test in relation to the acceptance of contributions.

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