Edited version of your written advice

Authorisation Number: 1051277832562

Date of advice: 7 December 2017

Ruling

Subject: Foreign superannuation lump sum transfers

Question 1

Is the Overseas Retirement Plan a ‘foreign superannuation fund’ for the purposes of section 305-55 of the Income Tax assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the Overseas Retirement Plan a ‘scheme’ for the purposes of section 305-55 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Taxpayer commenced employment overseas with the Employer.

The Taxpayer became a resident of Australia for tax purposes after moving to Australia to commence work in a new position with the Employer. The Taxpayer has remained a resident of Australia since this date.

The Taxpayer became a participant in the Employer’s Overseas Retirement Plan (the Plan) after transferring his employment with the Employer to Australia. Participation in the Plan formed part of the offer of employment in Australia.

The purpose of the Plan is to provide supplementary retirement income to internationally mobile employees of the Employer and related entities.

Benefits provided under the Plan can be withdrawn in the following circumstances:

n The participant retires at the earlier of:

(a) reaching the age of 55 and having completed 10 years of credited service with their employer; or

(b) reaching the age of 65;

n Upon the death of the participant;

n The participant retires due to permanent and total disability;

n The participant’s employment is terminated before their retirement date and they have ten or more years of credited service with their employer.

Each participant in the Plan will have an Accrued Account Balance, which could comprise Annual Allocations and/or Past Service Allocations.

The Annual Allocation credited to a participant’s Accrued Account Balance will be equal to the participant’s earnings multiplied by the Annual Allocation Percentage as specified in Appendix A to the Plan. The Annual Allocation percentage is determined with reference to the participant’s age plus years of credited service, and their work location.

A participant may also be entitled to a Past Service Allocation in respect to service prior to the Effective Date of the Plan. A Past Service Allocation will be determined by multiplying the applicable Annual Allocation percentage by the participant’s earnings for the relevant calendar year prior to the Effective Date of the Plan

The Plan does not require the Company to maintain any separate fund or segregate any assets to assure future distributions.

The Participant shall have the contracted right to receive benefits under the Plan. No Participant or Beneficiary will, in any event, have an interest in any particular asset of the Company.

Several years later, the Taxpayer’s employment with the Employer was terminated. At this time the taxpayer was more than 55 years of age and had more than ten years credited service with the Employer.

In a letter, the Taxpayer was advised that they were entitled to a benefit under the EDS Plan as their employment had been terminated. The taxpayer was also advised that they would receive a lump sum payment.

A few months later, an amount was deposited into the Taxpayer’s bank account.

An amount was also contributed into the Taxpayer’s Australian Superannuation Fund account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-95

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

Income Tax Assessment Act 1997 Paragraph 295-95(2)(a)

Income Tax Assessment Act 1997 Paragraph 295-95(2)(b)

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Section 305-55

Income Tax Assessment Act 1997 Subsection 305-55(1)

Income Tax Assessment Act 1997 Subsection 305-55(2)

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Subsection307-5(1)

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

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

Reasons for decision

Question 1

Summary

The Plan is not a foreign superannuation fund for the purposes of section 305-55 of the ITAA 1997.

Detailed reasoning

Foreign superannuation fund

As per the definition provided in subsection 995-95(1) a superannuation fund is a ‘foreign superannuation fund’ provided it is not an Australian superannuation fund. Therefore, determining whether the Plan is a ‘foreign superannuation fund’ is a matter of determining whether it is a superannuation fund in accordance with the definition provided in subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SISA), which states:

“superannuation fund means

(a) A fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

a public sector superannuation scheme.”

The first point to consider in relation to the definition provided in subsection 10(1) of the SISA is whether the Plan is an indefinitely continuing fund. The general view is that the phrase ‘indefinitely continuing fund’ does not mean that the fund must continue forever, but rather the governing rules should not specify an express termination date. The intended continuity of a fund is reflected in its purpose of providing retirement benefits to members. A fund should not apply its funds in a way which would make it unlikely that the member would receive any benefit on retirement.

The concept of an indefinitely continuing fund is not defined in the SISA but has been considered in several cases. One such case is Baker v FC of T 2015 ATC 10-399 in which Senior Member O’Loughlin addresses the issue with reference to Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468. Specifically, at paragraph 9, Senior Member O’Loughlin states:

“While expressed with reservation due to a lack of argument, in Cameron Brae Allsop and Stone JJ said that:

… the ordinary meaning of the word "indefinite" is "without distinct limitation of being or character; indeterminate, vague, undefined; of indetermined extent, amount or number"

Jessup J stated:

... I doubt that "indefinitely" could be given a meaning effectively equivalent to "forever", since the rules of every fund would have to contain, one would have thought, reasonable and practical provisions for the fund to be wound up where it had to be and …I am disposed to think that the facility for the fund to be wound up at any time by the trustee "for any reason" was inconsistent with the proposition. It may be that the relevant statutory meaning of "indefinitely" is "undefined" rather than "unlimited", but, in the absence of argument on the subject, I am not disposed to extend to the appellant the favour of adopting that meaning.”

At paragraph 10 of the judgement Senior Member O’Loughlin states:

“The sentiment to the effect that indefinite is not meant to be forever has a certain attraction to it as many contemporary superannuation funds, e.g. self-managed superannuation funds, implicitly, have an end date upon exhausting assets from which benefits may be paid but are nevertheless accepted as superannuation funds which entails acceptance that they are indefinitely continuing.”

In Baker, Senior Member O’Loughlin deemed it unnecessary to decide this question due to the conclusions reached on other questions. Similarly in this case, our conclusions in respect of other factors appear to be more useful in determining whether the EDS Plan is a superannuation fund. It is however acknowledged that the EDS Plan does not specify an end date. This indicates that its ‘life’ is undefined or unlimited.

The second point to consider in relation to subsection 10(1) is whether the Plan is a provident, benefit, superannuation or retirement fund. There is no definition of the phrase ‘provident, benefit, superannuation or retirement fund’ in either the ITAA 1936 or the SISA. However, the phrase 'provident, benefit and superannuation fund established for the benefit of employees' was considered by Kitto J in the High Court case of Mahony v Commissioner of Taxation (Cth) (1967) 14 ATD 519 (Mahony). In making reference to the three terms separately Kitto J stated:

“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.”

Also in Mahony, Kitto J 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).

Generally, a superannuation fund is a fund established as a legal trust with the purpose of providing benefits to fund members in the event of illness, disability, or retirement of a member. In the event of the death of a member a superannuation fund may also provide benefits to dependants of the deceased member.

The essential characteristics of a superannuation fund include a separate and identifiable fund of money or investments set aside and invested to earn income and/or capital growth for the purpose of providing benefits to participating members upon retirement after a prescribed age.

This view is reflected in the High Court decision in Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v Commissioner of Taxation (Cth) [No 2] (1966) 10 AITR 290; (1966) 14 ATD 333; 40 ALJR 265 (Scott), in which Windeyer J stated (at AITR 312; ATD 351):

“…..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.”

The views expressed by Kitto J in Mahony and Windeyer J in Scott, have been adopted by the Commissioner in ATO Private Ruling No 72090 which states:

“The word ‘fund’ and the context of its usage in the phrase 'provident, benefit or superannuation fund' implies that monies are set aside and invested for the provision benefits for the specific future purpose of an individual's retirement.

The Commissioner of Taxation's (the Commissioner'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 Act.”

It is noted that the Plan does not require the Employer to maintain any separate fund or segregate any assets to assure future distributions to participants. It is also noted that no cash contribution from the Employer or any participant is required or permitted. The fact that no contributions are made for or on behalf of participants in the Plan, and no fund of money and investments is maintained for the provision of future benefits, indicates that the Plan does not demonstrate the essential characteristics of a superannuation fund.

On that basis it is concluded that the Plan is not a superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

Question 2

Summary

The Plan is a Scheme for the purposes of section 305-55 of the ITAA 1997.

Detailed reasoning

The term 'scheme' is defined in subsection 995-1(1) of the ITAA 1997 as:

(a) any arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The term 'arrangement' is also defined in subsection 995-1(1) of the ITAA 1997 to mean any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

Further the Macquarie Dictionary (5th Edition) contains several definitions of the word ‘scheme'. The following is the most relevant of these definitions:

“a policy or plan officially adopted by a company, business, etc., as for pensions, loans, etc.”

In this case the Plan represents an arrangement under which the Employer makes a ‘promise’, gives an ‘undertaking’, or ‘agrees’ to make payments in certain circumstances to employees who are participants in the plan. Payments are made under the Plan to participants whose employment assignments involve transfers to different countries. These transfers may result in loss of retirement income due to being subject to multiple retirement programs and social security systems across different jurisdictions. The purpose of the Plan is to provide “supplementary retirement income” to internationally mobile employees.

The ‘document’ refers to the benefits provided as “supplementary retirement income”. Payments made under the Plan are essentially, formula based lump sum payments made following the occurrence of a trigger event (retirement, permanent and total disability, death or termination of employment). The EDS Plan is unfunded and unsecured in that the Employer does not set aside money in a separate entity or fund for the provision of benefits for participants upon the occurrence of a trigger event.

In view of the above, it is considered that the Plan does not represent a separate identifiable fund or pool of money. Rather it is a promise by the Employer to pay participants covered by the Plan in accordance with an arrangement or policy, which has been officially adopted by the Employer to provide participants with retirement benefits.

Accordingly the Plan can be seen as fitting with the above definitions of a scheme found in the ITAA 1997 and the Macquarie Dictionary.

The next issue to consider is whether the Plan is for the payment of benefits in the nature of superannuation upon retirement or death.

The terms 'in the nature of superannuation' or 'superannuation' are not defined in the Tax legislation. However, a definition is provided in subsection 995-1(1) of the ITAA 1997 for superannuation benefit as having the meaning given by section 307-5 of the ITAA 1997.

Basically subsection 307-5(1) of the ITAA 1997 views a superannuation benefit as a payment from a superannuation fund, a RSA, an ADF, a small superannuation account, etc which indicates payments from funds and accounts which have monies set aside for retirement and death situations.

The definition of superannuation benefit appears to be heavily concerned with where the payments are paid from and the sections of legislation that relate to the circumstances under which those monies are paid from the account.

However, for the purposes of subsection 305-55(2) of the ITAA 1997, there is no definite indicator as to whether 'in the nature of superannuation' is meant to be the same as the definition of 'superannuation benefit'. If in the nature of superannuation' was expected to have the same definition as 'superannuation benefit' one could assume that instead of 'in the nature of superannuation' the term 'superannuation benefit' would have been used.

Alternatively, 'in the nature of superannuation' may relate to a type of payment normally associated with superannuation.

In the Macquarie Dictionary, the definitions of the word 'superannuation' are:

1. the act of superannuating.

2. the state of being superannuated.

3. a pension or allowance to a superannuated person.

4. a sum paid periodically as contribution to a superannuation fund.

Following on from the above, two of the definitions of 'superannuated' are:

1. retired on account of age or infirmity.

2. too old for use, work, service, or a position.

The phrase 'in the nature of' is defined as:

1. of (or in) the nature of, having the qualities of.

Further to the above, it is noted that in Mahony v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 that Justice Kitto 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 (e.g. termination or resignation).

In adopting the alternative definition of 'in the nature of superannuation', it can be held that the Plan, already identified as a scheme, is set up for the payment of benefits in the nature of superannuation upon retirement or death as:

(i) the stated purpose of the Plan is the provision of ‘supplementary retirement income’;

(ii) the benefits payable by the Plan are formula based lump sum payments rather than payments in the nature of income stream or pension payments; and

(iii) the benefits payable under the Plan are triggered by events relating to the cessation of employment due to retirement, death, total and permanent disability, and termination of employment. Superannuation benefit payments in each of these circumstances are permitted under the SISA subject to various conditions or restrictions.

In view of the above, it is considered that the Plan is 'a scheme for the payment of benefits in the nature of superannuation upon death or retirement' for the purposes of subsection 305-55(2) of the ITAA 1997.

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