Edited version of your written advice

Authorisation Number: 1051474037341

Date of advice: 17 January 2019

Ruling

Subject: Foreign retirement funds

Question 1

Do any of the foreign retirement funds owned by the taxpayers meet the definition of a ‘foreign superannuation fund’ in subsection 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will any withdrawals made from the retirement funds be assessable in Australia under the superannuation provisions contained in Subdivision 305-B of the ITAA 1997?

Answer

No

Question 3

Will any withdrawals made from the retirement funds prior to 1 July 20XX be assessable in Australia under section 97 or section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 4

Will any withdrawals made from the retirement funds from 1 July 20XX be assessable in Australia under section 97 of the ITAA 1936?

Answer

No.

Question 5

Will any withdrawals made from the retirement funds from 1 July 20XX be assessable in Australia under section 99B of the ITAA 1936?

Answer

Yes.

Question 6

Will only the component of the withdrawals that represents earnings of retirement funds be assessable in Australia under section 99B of the ITAA 1936?

Answer

Yes.

Question 7

Will any pre or post 1 July 20XX earnings held in the retirement funds be assessable in Australia under section 97 or section 99B of the ITAA 1936 if they are not withdrawn from the funds?

Answer

No.

Question 8

Will a foreign income tax offset be available with respect to any foreign tax paid on any withdrawals made from the retirement funds?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayers are Australian citizens and have been residents for tax purposes since 1 July 20XX.

The taxpayers are also citizens of Country X.

The taxpayers own a number of retirement funds in Country X which consist of a mixture of the following contributions:

● pre-tax salary sacrifice contributions;

● employer contributions;

● after-tax contributions; and

● earnings on the above.

The funds allow withdrawals to be made in circumstances which include the following:

● from age X total benefits may be withdrawn without restriction or penalty;

● total benefits may be withdrawn at or after age Y provided the member has terminated employment with an employer;

● total benefits may be withdrawn upon termination of employment;

● after tax contributions may be withdrawn without restriction; and

● total benefits upon the death or disability of a member.

The Country X taxation of the funds and its benefits are:

● pre-tax salary sacrifice employee contributions, employer contributions and the fund earnings are not taxed until they are withdrawn by the member with the member paying tax on them when withdrawn, and

● after-tax contributions are not taxed on withdrawal.

One of the taxpayers owns a different type of retirement fund from which benefits may be withdrawn at any time, although penalties apply if withdrawn before a certain age.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1997 subdivision 305-B

Income Tax Assessment Act 1997 subsection 995-1

International Tax Agreements Act 1953

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Foreign superannuation fund

Lump sum payments received from foreign superannuation funds are assessable under Subdivision 305-B of the ITAA 1997.

Subsection 995-1 of the ITAA 1997 defines a ‘foreign superannuation fund’ as being a fund that is not an Australian superannuation fund. A ‘superannuation fund’ has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), 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;

The term ‘superannuation fund’ has been examined extensively by the High Court. 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. 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 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).

It is therefore the Commissioner’s view 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.

In this instance, you have advised that the foreign retirement funds allow monetary withdrawals to be made in circumstances which include the following:

● from age X total benefits may be withdrawn without restriction or penalty;

● total benefits may be withdrawn at or after age Y provided the member has terminated employment with an employer;

● total benefits may be withdrawn upon termination of employment; and

● after tax contributions may be withdrawn without restriction.

In respect to the other fund, benefits may be withdrawn at any time, although penalties apply if withdrawn before a certain age.

In this case, the funds do not ultimately provide the narrow range of benefits required by the definition of a superannuation fund. As the three funds may be accessed for pre-retirement purposes, they do not meet the ‘sole purpose test’ and therefore cannot be considered to be a ‘superannuation fund’ for the purposes of the superannuation legislation.

Therefore, any payments made from the funds will not be considered to be paid from a ‘foreign superannuation fund’ as defined in subsection 995-1 of the ITAA 1997.

As the funds do not meet the definition of a foreign superannuation fund, the superannuation legislation will not apply to any withdrawals made from the funds.

Receipt of trust income not previously subject to tax in Australia

A fund in the nature of a retirement or investment plan/fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder.

Section 99B of the ITAA 1936 deals with the receipt of trust income ‘not previously subject to tax’ in Australia and applies where an Australian resident taxpayer receives a lump sum payment from a foreign retirement or investment fund. Section 99B takes precedence over section 97 of the ITAA 1936 in assessing these types of payments.

Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust who was a resident at any time during the year of income, the amount is to be included in the assessable income of the beneficiary.

However, 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 is not to include any amount that represents the corpus of the trust, but not an amount that is attributable to income of the trust which would have been included in the assessable income of a resident taxpayer if it had been derived by that taxpayer.

Consequently, the assessable amount is the total amount received less any amounts deposited to the fund (the corpus) by the taxpayer, or on their behalf. The rule is that the taxpayer is taxed only on the earnings of the investment on withdrawal, not on the corpus returned to them. Any earnings in the funds are only assessable in Australia on withdrawal from the funds.

Operation of the double tax agreement between Australia and Country X

In determining liability to tax on foreign sourced income received by a tax resident of Australia it is also necessary to consider any applicable double tax agreement contained in the International Tax Agreements Act 1953.

The agreement between Australia and Country X does not contain any articles that specifically relate to the receipt of funds from a foreign retirement or investment fund, so Article XY which deals with income not expressly mentioned in the agreement will apply.

The article provides that income of a resident of one of the countries which is not expressly mentioned in the other articles of the agreement will be taxable only in the country of residency. However, if such income is derived by a resident of one of the countries from sources in the other country, such income may also be taxed in the country in which it has its source.

Therefore, the agreement allows both Australia and Country X to tax any withdrawals made from the funds.

Foreign income tax offset

Section 770-10 of the ITAA 1997 provides that you are entitled to claim a foreign income tax offset for foreign income tax paid in respect of an amount that is included in your assessable income.

Section 770-15 of the ITAA 1997 specifies that foreign income tax means tax that is imposed under a law other than an Australian law and is:

● tax on income

● tax on profits or gains, whether of an income or capital nature, or

● any other tax that is subject to an agreement covered by the International Tax Agreements Act 1953.

The double tax agreement between Australia and Country X states that Australia will allow a credit for tax paid in Country X, other than tax imposed solely by reason of citizenship, on income derived by a resident of Australia from sources in Country X.

Therefore, you are entitled to claim a foreign income tax offset for any income tax paid in Country X in respect of withdrawals made from the funds as Country X tax will be imposed under Article XY of the agreement.

However, the amount of the offset claimable in Australia will have to be apportioned taking into account the proportion of any fund withdrawal that is taxable in Country X and the proportion taxable in Australia.

Additional information

Calculation of assessable amount

ATO ID 2011/93 provides an example of the operation of section 99B of the ITAA 1936 in respect of the receipt of an amount that comprised solely of foreign interest income.

However, where a partial withdrawal is made from a fund and the fund does not specify what the withdrawn funds comprise of (eg client contributions or fund earnings), there may be issues in working out the assessable portion of the payment.

In circumstances such as these, and taking into account Australia’s self-assessment tax regime, it will be up to the taxpayer to make a reasonable estimate as to what the assessable proportion of the withdrawal may be. The Commissioner does not have a formal view on how to make this calculation.

However, as a starting point, the amount of total contributions to the fund by, and on behalf of, the taxpayer from the fund commencement date will have to be ascertained as accurately as possible. Comparison of this amount to the balance of the fund as at a certain date will provide a percentage proportion of corpus to earnings in the fund. If all monies were withdrawn from the fund at the same time, this percentage would be relevant in working out the assessable portion of the withdrawal.

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