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Ruling

Subject: foreign income

Question 1

Do the payments from your overseas employee provident fund form part of your assessable income in Australia?

Answer

No.

Question 2

Are the proceeds of your life insurance policy which you surrendered included in your assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You were working overseas for several years before coming to live in Australia.

You have been living in Australia for more than 20 years.

In 2010 you received a payment from your employee provident fund that you previously had while working overseas. You received this payment as a result of you withdrawing your benefits from the fund.

Information from websites relating to the fund show that, in addition to withdrawing benefits for retirement purposes, members can also withdraw benefits for housing, education and medical purposes.

You also surrendered your Life Insurance policy you had overseas since 1983 and received an amount in 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 6-15.

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Act 1997 Section 15-75.

Income Tax Assessment Act 1936 Section 26AH.

Reasons for decision

Lump sum payments from a foreign employee provident fund

The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia (sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997).

Statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law (section 6-10 of the ITAA 1997).

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income.

The payments from your employee provident fund are not assessable as ordinary income.

Where a lump sum payment from a foreign superannuation fund is received more than six months after a person has become an Australian resident, the applicable fund earnings in relation to that lump sum payment will be assessable under section 305-70 of the ITAA 1997.The applicable fund earnings is subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt 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 then section 305-70 will not have any application.

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.

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 (subsection 295-95(2) of the ITAA 1997). 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;

Provident, benefit, superannuation or retirement fund

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) 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 there from 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 Commissioner of Taxation (Cth) (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 such as the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kittos 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 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).

Though section 62 of the SIS Act also allows a superannuation fund to provide benefits for ancillary purposes, such as, 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, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses.

Notwithstanding the SIS Act applies only to regulated superannuation funds, as defined in section 19 of the SIS Act, and foreign superannuation funds do not qualify as regulated superannuation funds, as they are established and operate outside Australia, the Commissioner views the SIS Act (and its regulations) 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 Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it 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, invalidity or death of the individual or as specified under the SIS Act.

Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund:

(i)               can also be used as a savings plan for non-retirement purposes; and/or

(ii)             contains provisions for pre-retirement withdrawals for general non-retirement purposes such as housing, education and medical expenses.

The employee provident fund you had overseas satisfies some of the requirements of a foreign superannuation fund as it is established outside of Australia and the central management and control is outside of Australia. However, the fund is not regarded as a provident, benefit, superannuation or retirement fund as a member of the fund can receive a payment for reasons other than death, invalidity or retirement.

Consequently, the fund is not a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. Therefore section 305-70 of the ITAA 1997 will not have any application to the payment from the fund.

There is no other provision in the Australian taxation provisions that apply to your employee provident fund payments. As the payments are not regarded as assessable income, they are not included on your 2010-11 tax return.

Life insurance policy payment

The lump sum proceeds of a life insurance policy are capital and are not assessable as ordinary income.

Taxation Ruling IT 2504 discusses life assurance policies, and states that bonuses received on a policy of life assurance are not income according to ordinary concepts and therefore are not assessable income under section 6-5 of the ITAA 1997.

In your case, the proceeds on surrendering your foreign life assurance policy are not ordinary income. However, it is necessary to consider whether the amounts received on maturity constitute statutory income.

The specific provisions of the income tax law which are relevant to life assurance policies are discussed below.

Section 15-75 of the ITAA 1997 provides that your assessable income includes any amount received as a bonus, other than a reversionary bonus, on a life insurance policy.

A reversionary bonus is one paid on maturity, forfeiture or surrender of a life assurance policy. A reversionary bonus accumulates within the policy and is to be contrasted with a bonus which is payable annually.

Your received a payment or bonus on the surrender of your life assurance policy. Your bonuses were reversionary bonuses, and therefore section 15-75 of the ITAA 1997 does not apply.

Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in assessable income certain reversionary bonuses received in respect of life assurance policies where the date of commencement is after 27 August 1982.

Your policy commenced after 27 August 1982, so section 26AH of the ITAA 1936 applies. However, as your bonus was received more than 10 years from the date of commencement of risk, it is tax free.

The capital gains tax (CGT) provisions operate in certain circumstances when there is a disposal of an asset. As your interest in the life assurance policy was acquired prior to 20 September 1985, the CGT provisions do not apply.

The proceeds you received on maturity of your life insurance policy are not assessable income as they are neither ordinary nor statutory income. You therefore do not have to pay tax on the proceeds and they do not need to be included in your 2010-11 tax return.

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