Edited version of private advice

Authorisation Number: 1051254765066

Date of advice: 20 October 2017

Ruling

Subject: Lump sum transfer from a foreign superfund

Question 1

Is any part of a lump payment to be received from a foreign pension fund assessable as applicable fund earnings as worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will any part of the payment to be received from a foreign pension fund be included in your assessable income under sections 97 and 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You ceased employment overseas in 20XX.

You became an Australian resident for tax purposes in 20XX.

You hold an interest in a pension scheme in a foreign country (the Foreign Fund).

The document you have provided gives the conditions of early withdrawal from the Foreign Fund. It states amongst other matters, that:

• in accordance with a particular article the pension assets can only be paid out to the person, at the earliest, five years before and, at the latest, five years after attainment of the age of retirement.
• pension assets may be paid out in advance if the member uses his or her pension assets for:

a)    the acquisition and construction of residential property for his/her own use;

b)    participation in or repayment of mortgage loans on such a residence.

You have yet to transfer the amount in the Foreign Fund into Australia.

You are less than 50 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97

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 1997 Section 6-10

Income Tax Assessment Act 1997 Subsection 6-10(4)

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Subsection295-95(2)

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Section 305--55

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Subsection995-1(1)

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Subsection 10(1)

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Summary

The lump sum payment from the Foreign Fund will not be considered a payment from a 'foreign superannuation fund', therefore, subdivision 305-B of the ITAA 1997 has no application in this case.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds.

Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income.

Before determining whether an amount is assessable under section 305-70, 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 subdivision 305-B will not apply.

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 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.

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.

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Subsection 10(1) of the SISA provides that:

superannuation fund means:

(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.

Meaning of 'provident, benefit, superannuation or retirement fund'

The High Court examined both the terms superannuation fundand 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 judgment 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 (SISR)) 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 SISA.

Information available indicates that part of the benefits in the Foreign Fund can be accessed at the earliest, five years before reaching the standard retirement age. Benefits in the Foreign Fund may also be used for purposes such as:

· To purchase or build residential property intended for the member's own use or to acquire participations in owner-occupied residential property; or

· To repay a mortgage loan on an owner-occupied residential property.

As the benefits in the Foreign Fund can be accessed for pre-retirement purposes, the Foreign Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

Therefore, on the basis of the information provided, the Commissioner considers that the lump sum payments from the Foreign Fund will not be received from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Consequently, Subdivision 305-B of the ITAA 1997 does not apply to the lump sum payment that you will receive from the Foreign Fund.

Question 2

Summary

Any part of the payment that represents earnings on the corpus of the trust (i.e. the Foreign Fund) will be included in your assessable income under section 97 and subsection 99B(1) of the ITAA 1936.

The portion of the funds that represents the corpus of the trust, that is contributions made by you or your employer, will not be included in your assessable income.

Detailed reasoning

Before we can consider the tax consequences of proceeds from the Foreign Fund, we must first consider whether it is considered a foreign trust or a foreign superannuation fund. It has been determined above that the Foreign Fund is not a superannuation fund for Australian tax purposes.

Therefore as an Australian resident you will be subject to the general tax rules applicable to your circumstances, in this case the general tax rules relating to trust income.

Assessability of trust income

Section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to sections 97 and 99B of the ITAA 1936.

Section 97 of the ITAA 1936 includes in a person's assessable income distributions of income made by a trust to the person as a beneficiary.

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, the 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 beneficiary's income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA 1936).

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).

Income derived while beneficiary was a non-resident

ATO ID 2011/93 considers the tax implications when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income. It states that:

The trust property paid to the resident beneficiary is attributable to foreign source interest derived by the trust. As interest income would have been assessable had it been derived by a resident taxpayer, and as the interest income has not been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, none of the exclusions in subsection 99B(2) of the ITAA 1936 applies to reduce the amount included in the assessable income of the beneficiary.

A question arises however whether the non-resident status of the beneficiary for the period in which the interest was derived by the trust estate in any way alters the outcome under the provision.

It is clear from the language of section 99B of the ITAA 1936... that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust. Rather, the only explicit condition concerning residency is that the beneficiary be a resident at some time during the year of income in which the trust property is paid to them or applied for their benefit.

Application to your circumstances

You intend to withdraw your funds from the Foreign Fund. The Foreign Fund was holding and investing your contributions for your benefit. It is therefore considered it took on the form of a trust.

Any part of the payment you receive that represents amounts deposited by you or your employer will not be included in your assessable income in accordance with subsection 99B(2) of the ITAA 1936. These amounts are considered the corpus of the trust.

However, any part of the payment that represents income derived by the Foreign Fund on the corpus of the trust during the part of the financial year the withdrawal is made will be included in your assessable income under section 97 of the ITAA 1936.

Any part of the withdrawal that represents earnings on the corpus of the trust prior to the income year that the withdrawal is made will be assessed under subsection 99B(1) of the ITAA 1936.

It is noted that taxpayers in similar situations have previously argued that the balance of the fund at the commencement of their Australian residency should be excluded under section 99B(2) of the ITAA 1936 and treated as corpus as they believe it had no associated connection with Australia via residency or source during the time it was accrued.

However, ATO ID 2011/93 clearly states that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust.

Additional information

Note that a foreign income tax offset may be available to you in relation to any foreign tax paid on the income assessed in Australia. For more information, search for Quick Code (QC) 48121 at www.ato.gov.au.

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