Edited version of your private ruling

Authorisation Number: 1012425207178

Ruling

Subject: Foreign superannuation fund

Questions:

1. Is the retirement fund in a foreign country a 'superannuation fund' for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is the retirement fund in a foreign country a 'foreign superannuation fund' for the purposes of the ITAA 1997?

Advice/Answers:

1. Yes.

2. Yes.

This ruling applies for the following period:

1 July 2012 to 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

More than ten years ago a retirement fund (the Fund) was established in a foreign country by a Deed of Trust made between a company as the Principal Employer and another company as Trustee.

The current trustee of the Fund is a third company (the Trustee).

The Principal employer company was incorporated in a foreign country with its registered office in that country.

The Trustee company was incorporated in a different foreign country with its registered office in that country.

The original Trust Deed has been added to and varied over time by various variation Deeds. The final version is dated in the relevant income year.

The Trustee holds a trust business licence under the legislation of the foreign country where the Fund was established in respect of the Fund. It is also licensed by another Authority of that country.

Meetings of the Trustee's directors are all conducted in the foreign country where the Fund was established.

The Fund has a large amount of monies under management for its members and a small percentage of the Fund's portfolio of assets is invested in Australian assets. To date no person applying for membership of the Fund has been an Australian resident.

The managers appointed by the Trustee to manage the Fund assets are located in two different foreign countries. None of the Fund managers are in Australia.

The Trustee wants to offer fund membership to employees of Australian public companies, their subsidiaries and affiliates working outside Australia (target employees).

These members will be ordinary members. The target employees will include Australian residents, former Australian residents who may return to Australia and foreigners who subsequently become Australian residents.

The retirement benefit payable to ordinary members are calculated according to their own individual accumulation account with the Fund.

The Fund may also potentially have discretionary class members who will be non-residents working for non-resident companies. The amount of benefit payable to a discretionary class member from assets of the Fund allocated to the discretionary class is subject to the Trustee's discretion.

The Fund is established and maintained solely for the purpose of providing superannuation benefits for Members in the event of their retirement or in certain circumstances, for the dependants of members.

The Deed provides the following in relation to contributions made to the Fund:

· that member contributions may be deducted by the employer of the member and be paid to the Fund

· discretionary class members do not make contributions to the Fund; and

· an employer will contribute in respect of an employee who is the member of the Fund and may make contributions for discretionary class members.

No member, beneficiary, or relative of either, has the right to borrow against the security of any of the benefits expected to be received from the Fund.

No member or dependant of a member shall be entitled to receive any benefit prior to the member retiring from gainful employment except on total and permanent disablement or death of the member or in other exceptional circumstances acceptable to the Trustee and in which the Trustee considers it proper, equitable and in accordance with the objects of the Fund.

The Fund will be wound up only if:

· the employer is no longer able to make contributions due to being placed in receivership, liquidation or if the employer permanently terminates its contributions to the Fund by notice in writing to the Trustee; or

· there are no further members remaining in the Fund; or

· the Trustee otherwise determines for any reason that the Fund should be wound up.

For ordinary members, lump sums or pensions are payable when the member meets one of the following conditions:

· retires from the workforce at or after normal retirement age;

· retires from employment with an employer at or after normal retirement age;

· reaches the age of 60 years;

· becomes totally and permanently disabled;

· becomes temporarily totally disabled; or

· dies.

Discretionary members benefits will be provided as lump sums or pensions when or anytime after the member:

· retires from gainful employment with the employer at or after normal retirement age;

· retires from the workforce;

· becomes totally and permanently disabled in the opinion of the Trustee; or

· retires from gainful employment with the employer and there is no arrangement in place for the member to be re-employer by the employer or associated entity and further the member is not dismissed or due to be dismissed by the employer.

The contributions made to the Fund by Australian employers will not include any mandatory superannuation contributions for superannuation guarantee charge purposes.

The private ruling is being sought in order to clarify that any benefits held for non-resident employees are in a foreign superannuation fund for Australian tax purposes in case any such members become future Australian residents.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 290-10

Income Tax Assessment Act 1997 Section 290-75

Income Tax Assessment Act 1997 Section 290-10

Income Tax Assessment Act 1997 Subsection 290-10(2)

Income Tax Assessment Act 1997 Subsection 295-95(2)

Income Tax Assessment Act 1997 Subsection 295-95(3)

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

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Summary

The fund in the foreign country is a foreign superannuation fund.

Detailed reasoning

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 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.

Subsection 295-95(3) of the ITAA 1997 states:

A member is covered by this subsection at a time if the member is:

(a) a contributor to the fund at that time; or

(b) an individual on whose behalf contributions have been made, other than an individual:

(i) who is a foreign resident; and

(ii) who is not a contributor at that time; and

(iii) for whom contributions made to the fund on the individual's behalf after the individual became a foreign resident are only payments in respect of a time when the individual was an Australian resident.

Thus, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia could 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 same 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. 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' 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 SIS Act, 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 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 the SIS 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, in order for a foreign fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above.

Thus, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia could qualify as a foreign superannuation fund. Further, 50% of the total market value of the fund's assets or amounts payable to or in respect of members should not be attributable to superannuation interests held by active members who are Australian residents.

We will first need to determine if the foreign retirement fund (the Fund) is a superannuation fund before we can consider it to be a foreign superannuation fund, that is, whether the sole purpose of the Fund is to provide payments of benefits upon invalidity, retirement or death of the fund member.

The Trust Deed (the Deed) of the Fund states that the Fund is established and maintained solely for the purpose of providing superannuation benefits for Members in the event of their retirement or in certain circumstances, for the dependants of members.

The Fund has two classes of membership, that is, ordinary members and discretionary members. The retirement benefits payable to discretionary class members on retirement, from assets of the Fund, allocated to the discretionary class is subject to the Trustee's discretion.

There is no Trustee discretion in the case of ordinary members. The retirement benefits payable to them are calculated according to the balance of their own individual accumulation account with the Fund.

Therefore it is possible that the discretionary members may not receive a benefit as the benefits are payable to them at the Trustee's discretion. However, this issue was considered in the case of Cameron Brae Pty Ltd v. Federal Commissioner of Taxation; [2007] FCAFC 135; (2007) 2007 ATC 4936; (2007) 67 ATR 178; (2007) 161 FCR 468; (2007) 243 ALR 273 (Cameron Brae). It was decided in that case that a fund can be a superannuation fund even though it has ordinary and discretionary class members. Justice Jessup stated in the judgement that even though a discretionary class member did not receive a benefit, this did not disqualify the fund from being a superannuation fund. Consequently, the Fund may be a superannuation fund provided it meets all the other requirements of being a superannuation fund. These requirements are considered below.

1. Fund

It must first be determined if the Fund is a 'fund' before it can be considered a superannuation fund. ATO interpretative Decision 2009/67 Income Tax - Superannuation fund for foreign residents states:

The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne defines the term 'fund' as 1 a permanent stock of something ready to be drawn upon... 2 a stock of money, especially one set apart for a purpose.

The trust Deed of the Fund provides the following in relation to contributions made to the Fund.

Member contributions

Contributions payable by an ordinary class member or may be deducted by the member's employer from the member's salary and paid into the Fund. Discretionary class members do not make contributions to the Fund.

Employer contributions

Employers of members including those of discretionary class members can make contributions to the Fund for the purposes of making provision of benefits for members.

In this case contributions are being made to the fund, which are invested by the Trustee of the Fund and benefits are paid to ordinary members on retirement according to the balance of their own individual accumulation account with the Fund. Benefits are paid to discretionary class members on retirement, from assets of the Fund. Consequently, as monies are available to be paid out to members, the Fund is considered a 'fund'.

2. Indefinitely continuing fund

The Deed states in the winding up clause that it will be wound up only if:

· the employer is no longer able to make contributions due to being placed in receivership, liquidation or if the employer permanently terminates its contributions to the Fund by notice in writing to the trustee; or

· there are no further members remaining in the Fund; or

· the Trustee otherwise determines for any reason that the Fund should be wound up.

The ruling application states that though the Trustee has the power to wind up the Fund it has not exercised that power and there is no specific date by which it will exercise that power. The Deed does not state that the Fund will be wound up after a specific period.

In Cameron Brae it was concluded that the fund was an indefinitely continuing fund where the deed of that fund contained a similar clause to the winding up clause of the Deed of the Fund, that is, the trustee could wind up the fund for any reason. Therefore it is accepted that there is the intention and expectation that the Fund will be a indefinitely continuing fund.

3. Provident, benefit , superannuation or retirement fund

In terms of the Deed of the Fund its sole purpose is to provide benefits as lump sums or pensions in respect of participating ordinary members when or anytime after the member:

· retires from the workforce at or after normal retirement age;

· retires from employment with an employer at or after normal retirement age;

· reaches the age of 60 years;

· terminates employment or is absent from employment because of retirement or total disablement; or

· dies.

Discretionary members will have lump sums and pensions from the available assets of the Fund as determined by the Trustee when or anytime after the member:

· retires from gainful employment with the employer at or after normal retirement age;

· retires from the workforce;

· becomes totally and permanently disabled in the opinion of the Trustee; or

· retires from gainful employment with the employer and there is no arrangement in place to for the member to be re-employer by the employer or associated entity and further the member is not dismissed or due to be dismissed by the employer.

Therefore it is clear that the benefits paid under the above provisions are payable upon events common to superannuation funds, that is, on retirement, disability or death.

Further, a member is not entitled to borrow against the security of benefit entitlements or to receive benefits prior to the above events. Therefore a member is not able to make early withdrawals for purposes other than those relating to retirement, for example, for education, home loans or medical expenses.

Consequently, as per Scott, discussed above, the Fund's sole purpose is to provide benefits for members on retirement. As a result the Fund is a superannuation fund.

Foreign superannuation fund

As stated above a foreign superannuation fund is a superannuation fund that is not an Australian superannuation fund. Therefore the following conditions must be met for the Fund to be an Australian superannuation fund.

Australian superannuation fund

In accordance with the definition in subsection 295-95(2) of the ITAA 1997, a superannuation fund is an 'Australian superannuation fund' if all the following conditions are met.

1. Fund established in Australia or any asset of the fund situated in Australia:

The Fund was incorporated and has its registered office located in a foreign country and is therefore established outside Australia. A small percentage of the Fund's portfolio of assets is invested in Australia. Therefore this condition is satisfied.

2. Central management and control ordinarily in Australia

The management and control of the Fund is in the foreign country where the Fund was established where majority of the directors reside. The other director/s resides in another foreign country. The meetings of the directors are held in the country where the Fund was established. The Fund only engages fund managers in the two foreign countries to manage assets of the Fund. There are no Australian fund managers. Therefore management and control of the Fund is outside Australia so this condition has not been satisfied.

3. Active member test

Fifty per cent of the total market value of a fund's assets or amounts payable to or in respect of members are required to be attributable to superannuation interests held by active members who are Australian residents, for a fund to be an Australian superannuation fund.

In accordance with subsection 295-95(3) of the ITAA 1997, members who are foreign residents cannot be active members. The Fund only has foreign residents as its members and therefore there are no active members who are Australian residents holding 50% of the Fund's assets. Consequently, this test is not satisfied.

The Fund is not an Australian superannuation fund

As all of the above conditions have not been met the Fund is not an Australian superannuation fund.

Conclusion

As the Fund is not an Australian superannuation fund, the Fund is a foreign superannuation fund.

Please note that, in accordance with sections 290-10 and 290-75 of the ITAA 1997, if employers in Australia make contributions to the Fund they will not be eligible to claim a deduction for the contributions as the contributions will not be made to a complying superannuation fund.

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