Edited version of your written advice

Authorisation Number: 1051452688004

Date of advice: 11 January 2019

Ruling

Subject: Lump sum transfer from a foreign fund

Question

Is any part of the benefit to be received by you from two overseas pension schemes assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question

Will any portion of the proposed lump sum payments from the overseas funds be included in your assessable income?

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 lived and worked in a foreign country.

In 20XX you emigrated to Australia on a 457 visa.

You become a permanent resident of Australia in 20XX and an Australian citizen in 20XX.

You gave up your permanent residence in the foreign country in 20XX and you are no longer a tax citizen of the foreign country.

You hold an interest in the two pension schemes in the foreign country.

Documents provide the conditions of withdrawal from the two foreign funds and provides the circumstances under which amounts can be withdrawn.

The documents indicate that as well as providing benefits on retirement, invalidity and death, the Foreign Funds also provides benefits for purposes such as:

● to pay medical costs incurred by the Participant, their spouse, their children, their dependents or the Beneficiary under the Fund Agreement;

● to purchase the Participants home;

● to pay for the higher educational expenses of the Participant, their spouse, their children, their dependents or the Beneficiary under the Fund Agreement; or

● to pay expenses for the repair of damage to the Participants principal resident.

Your international tax advisors in the foreign country have advised you that the distributions will not taxable in the foreign country under the Double Tax Agreement between Australia and the foreign country. You will not pay any foreign tax on the distributions.

You have not yet rolled over your benefits from either foreign fund into an Australian superannuation fund or Australian bank account. However, you are planning to do this during the 2018-19 income year.

Relevant legislative provisions

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 subsection 295-95(2)

Income Tax Assessment Act 1997 section 301-10

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 section 960-50

Income Tax Assessment Act 1997 subsection 960-50(1)

Income Tax Assessment Act 1997 subsection 960-50(4)

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

Income Tax Assessment Act 1936 subsection 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 paragraph 99B(2)

Income Tax Assessment Act 1936 paragraph 99B(2)(a)

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Question 1

Summary

The Foreign Funds are not considered to be superannuation funds for the purposes of Subdivision 305-B of the ITAA 1997. Therefore, no part of a lump sum payment from the Foreign Funds would be assessable as applicable fund earnings as calculated under subsection 305-75 of the ITAA 1997.

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.

Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax-free. It is not assessable income and is not exempt income (sections 305-60 and 305-65 of the ITAA 1997).

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

Before determining whether an amount is exempt under sections 305-60, or 305-65 of the ITAA 1997, or 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.

Relevantly, 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 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 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 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 and the SISR.

In this case, information available indicates that as well as providing benefits on retirement, invalidity and death, the Foreign Funds also provides benefits for purposes such as:

● to pay medical costs incurred by the Participant, their spouse, their children, their dependents or the Beneficiary under the Fund Agreement;

● to purchase the Participants home;

● to pay for the higher educational expenses of the Participant, their spouse, their children, their dependents or the Beneficiary under the Fund Agreement; or

● to pay expenses for the repair of damage to the Participants principal resident.

Because the benefits in the Foreign Funds are also paid for other than retirement purposes, the Foreign Funds do not meet the 'sole purpose test' and therefore cannot be considered 'superannuation funds' for Australian income tax purposes.

Consequently, Subdivision 305-B of the ITAA 1997 would not apply to any lump sum payments received from the Foreign Funds.

Question 2

Summary

The income accumulated in the accounts (paid to you as a resident taxpayer) that are normally taxable in Australia and had not been previously subjected to tax in Australia will be assessable to you under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

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.

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 section 99B of the ITAA 1936.

A fund in the nature of a retirement fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder. Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is 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 beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936).

Specifically, paragraph 99B(2)(a) of the ITAA 1936 provides that assessable income will not include the corpus (capital) of the trust. An amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer is not excluded under the corpus exception. For example, if, in accordance with the terms of the trust, income was accumulated and added to the 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).

In this case, you intend to redeem your interests from the funds as lump sum payments. The income accumulated in the funds (paid to you as a resident taxpayer) that is normally taxable in Australia and had not been previously subjected to tax in Australia will be assessable to you under subsection 99B(1) of the ITAA 1936. This is because withdrawn amounts are similar to a distribution from a trust and you will receive an amount of trust property during an income year in which you are a resident.

A withdrawal of an amount that represents amounts deposited by you would come within paragraph 99B(2)(a) of the ITAA 1936. The payments (distributions), to the extent that they come within subsection 99B(2) of the ITAA 1936, will be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936.

Only the income accumulated in the funds paid to you as a resident taxpayer who is normally taxable in Australia and had not previously been subject to tax in Australia will be included in your assessable income.

Therefore, it is the gross amount you will receive converted to Australian dollars, less the amount that represents deposits to the fund converted to Australian dollars, that will be the amount assessable under subsection 99B(1) of the ITAA 1936.

Tax Consequences

The amount assessable under subsection 99B(1) of the ITAA 1936 will be assessable under that section regardless of whether it is transferred to your Australian super fund, or to you directly.

You cannot elect to have the Australian superannuation fund pay the tax on the applicable fund earnings in accordance with section 305-80 of the ITAA 1997. This is because the Foreign Funds are not considered to be superannuation funds for the purposes of Subdivision 305-B of the ITAA 1997, and therefore no part of a lump sum payment from the Foreign Funds will be assessable as applicable fund earnings as calculated under subsection 305-75 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).