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Authorisation Number: 1013042201822

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Date of advice: 1 July 2016

Ruling

Subject: Foreign superannuation fund

Question

Is the retirement fund located and established in a foreign country 'foreign fund' within the meaning of that expression in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), including for the purposes of Division 305 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 2016

The scheme commenced on:

1 July 2015

Relevant legislative provisions:

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

Relevant facts and circumstances

During the 20xx-yy income year, a retirement fund (the Fund) was established by a Deed of Trust made between two companies, Company 1 and Company 2.

The trustee of the Fund is a company (the Trustee) which is part of a group that is a global independent provider of trust, fiduciary, corporate and fund services.

Company 1 was incorporated overseas with its registered office also overseas.

Company 2 was incorporated overseas with its registered office also overseas.

The original Trust Deed has been added to and varied over time by various variation Deeds.

The Trustee holds a trust business licence under the relevant foreign legislation in respect of the Fund. It is also licensed by the relevant Monetary Authority.

Meetings of the Trustee's directors are all conducted overseas

Less than 20% of the Fund's portfolio of assets is invested in Australian assets. Only a few members of the Fund are Australian residents.

The managers appointed by the Trustee to manage the Fund assets are located overseas except for one Australian Fund manager that manages less than 1% of the assets.

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

(a) Members' Contributions

i) ... Contributions payable by a Member may, with the Member's consent, be deducted by the Member's Employer from each wage or salary payment and paid by the employer to the Fund...

ii) Discretionary Class Members shall not make... Contributions to the Fund...

(b) Employer's Contributions

i) ... an Employer will contribute to the Fund in respect of a particular Employee who is a Member of the Fund...

ii) An Employer may make Contributions for the purposes of making provision for benefits for Members of the Relevant Discretionary Class.

iii) ...

Under a clause of the Deed no member, beneficiary, relative of either, has the right to borrow against the security of any of the benefits expected to be received under the Deed.

A clause of the Deed states, in part, that:

... i) no Member or Dependant of a Member shall be entitled to receive any Benefit prior to the Member retiring from Gainful Employment otherwise than in the event of 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 pursuance of the objects of the Fund...

The Deed states that the Fund will be wound up 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 Deed states that 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.

The Deed states that for discretionary members benefits will be provided as lump sums or pensions when or any time 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.

A clause in the trust Deed confers upon the Trustee the power to vary the Trust Deed. Accordingly the trustee has made the following variations in accordance with a Deed of Variation dated during the 20VV-WW income year:

A paragraph has been added to RECITALS. It states:

By this Deed the Trustee wishes to vary the provisions of the Trust Deed pursuant to clause 'x' in the manner hereinafter appearing.

A clause shall be varied to state the following:

Notwithstanding anything hereinbefore, contained, the Trustee may from time to time in its absolute discretion as it thinks fit do any or all of the following in relation to keeping any accounts for the Funds, including in relation to any Accumulation Account or any Account of any Discretionary Cass, or accounting for any income or capital of the Fund:

i)…

ii) …

A Clause will be added to state:

The funds in each Accumulation Account, each Account of any Discretionary Class and each separate and discretionary account established and maintained pursuant to this Deed shall be held by the Trustee as a separate trust fund for the benefit of the relevant Member or Discretionary Class Members (as the case may be) according to the terms and conditions applicable to that account under this Deed and on and subject to the terms, provisions and conditions of this Deed, including (without limitation) Clause 'x' and Clause 'x'.

A clause shall be revoked and replaced with the following new clause:

(d) Types of investments

Without limiting the generality of Clause 'x' and notwithstanding any former investment restriction or restraint, the Fund may invest in investments in any country, including (without limitation):

(i) real estate;

(ii) currency;

(iii) deposits with banks or financial institutions;

(iv) shares, units, options, debentures or bonds issued by any company or trust, whether or not listed on a stock exchange;

(v) bonds issued by any government or governmental, semi-governmental or public authority.

Further the Deed of Variation dated during the 20VV-WW income year states that:

• After execution of the Deed the Fund will continue to be the same super fund as when it commenced, continue to be a super fund, have the same members and no new members will be added, have the same assets and no new assets shall be added.

• The Trustee is of the opinion and declares that the Deed and the additions, amendments, alterations, modifications, rescissions and variations are for the benefit of the present and any future members of the Fund and their dependents.

• These changes will not reduce any benefit calculated on the basis of contributions to the Fund and earnings on those contributions that have accrued and become payable before the changes; or

• Reduce the amount of the benefit other than a benefit in the paragraph above that is or may become payable in relation to a period before the date of execution of this Deed.

Reasons for decision

Summary

The Fund 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

(a) 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.

In summary, the Fund in this case will be a superannuation fund if it can be established that:

• it is a 'fund';

• it is indefinitely continuing; and

• it is a provident, benefit, superannuation or retirement fund

Fund

According to Justice Windeyer in Scott above, a fund 'ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised.'

In accordance with clause 22 of the Deed, contributions are made to the Fund for/on behalf of the members of the Fund and then invested by the Trustee with the income therefrom being capitalised until such time as benefits are paid to members on meeting certain conditions.

Consequently, in this case, there is a 'fund' that is set aside and invested for the purpose of paying benefits to the members of the Fund.

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 in 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.

Provident, benefit , superannuation or retirement fund

In accordance with 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:

(i) retires from the workforce at or after normal retirement age;

(ii) retires from employment with an employer at or after normal retirement age;

(iii) reaches the age of 60 years;

(iv) terminates employment or is absent from employment because of retirement or total disablement; or

(v) 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:

(i) retires from gainful employment with the employer at or after normal retirement age;

(ii) retires from the workforce;

(iii) becomes totally and permanently disabled in the opinion of the Trustee; or

(iv) 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. In order for a superannuation fund to be an Australian superannuation fund, all of the conditions under subsection 295-95(2) of the ITAA 1997 must be satisfied.

In this case, the management and control of the Fund is not in Australia. All of the conditions under subsection 295-95(2) of the ITAA 1997 must be satisfied in order for the Fund to be an Australian superannuation Fund. As the condition under paragraph 295-95(b) has not been met, there is no need to consider the other conditions. The Fund is not an Australian superannuation fund in this case; instead, it is a foreign superannuation fund.

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