Edited version of your written advice

Date of advice: 25 February 2019

Authorisation Number: 1051477801596

Ruling

Subject: Lump sum payment received from a retirement plan-non-assessable-non-exempt income

Question 1

For the purposes of section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997), is the Retirement Plan a foreign superannuation fund?

Answer

No

Question 2

Is a lump sum payment received from the Retirement Plan regarded as non-assessable and non-exempt income under section 305-60 of the ITAA 1997, if received within six months of becoming resident of Australia for tax purposes?

Answer

No

Question 3

If the Taxpayer is a resident of Australia for taxation purposes, will the receipt of a lump sum pay-out from the Fund be subject to income or capital gains tax?

Answer

See response provided below.

Question 4

If the Taxpayer is a non-resident of Australia for taxation purposes, will the receipt of a lump sum pay-out from the Fund be subject to income or capital gains tax?

Answer

See response provided below.

This ruling applies for:

Year ending 30 June 2019:

The scheme commences on:

The scheme has not yet commenced.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

● The Taxpayer left Australia in 19XX for their employment with employer.

● In this whole time the Taxpayer was not a resident for tax purposes of Australia, residing in several overseas countries.

● During their time overseas they were a member of the Retirement Plan.

● The Retirement Plan is marketed as a defined benefit fund, but under the rules of the Retirement Plan a member can make voluntary contributions.

● Under the Retirement Plan rules, a member has the right at any time to request payment of part of or the entire portion of their account that is made up of voluntary contributions, with such a request being at the discretion of the trustee.

● Also, the Retirement Plan rules if the member’s employment ceases other than by retirement, disability or death, provided the member is 50 years of age, they are entitled to an early retirement. The years of service of the member will determine how much of their super interest will be vested to the member.

● If the member is under the age of 55 years, the trustee of the Retirement Plan may not give their consent to the early retirement payment to the member and instead hold the money on trust until they reach 55 years of age.

● The rules of the Retirement Plan also allow for member benefits to be paid in the event of disability and death of the member, as well as termination of employment.

● The Taxpayer will cease employment in 2018, with the lump sum being payable thirty days following termination of employment. The Taxpayer will be 50 years of age when they cease employment.

Reasons for decision

Lump sum payments from foreign superannuation funds

1. Under section 305-60 of the ITAA 1997, a lump sum payment from a foreign superannuation fund is non-assessable, non-exempt income if:

(a) you receive it within 6 months after you become an Australian resident; and

(b) it relates only to a period:

(i) when you were not an Australia resident; or

(ii) starting after you became an Australian resident and ending before you receive the payment; and

(c) It does not exceed the amount in the fund that was vested in you when you received the payment.

2. Before determining whether section 305-60 of the ITAA 1997 applies, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund.

Foreign superannuation fund

3. 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.

4. Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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.

5. 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 (SISA), which requires that the fund is a provident, benefit, superannuation or retirement fund.

Provident, benefit, superannuation or retirement fund

6. 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).

7. In that case, 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.

8. 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).

9. 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 SIS Regulations) as providing guidance as to what ‘benefit’ or ‘specific future purpose’ a superannuation fund should provide.

10. 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.

11. Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund:

(a) can also be used as a savings plan for non-retirement purposes; and/or

(b) contains provisions for pre-retirement withdrawals for general non retirement purposes such as housing, education and medical expenses.

12. It is noted that the Retirement Plan satisfies some of the requirements of a foreign superannuation fund as it is established and operated outside Australia and the central management and control is outside of Australia. However, the Retirement Plan is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purposes of the individual’s retirement. Members can withdraw benefits prior to retirement age. In other words, the Retirement Plan provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

13. The remaining requirements under section 305-60 of the ITAA 1997 must also be satisfied:

● you received the payment within six months of becoming an Australian resident;

● the payment relates to a period where you were a non-resident; and

● the payment does not exceed the amount that was vested in you when the payment was made.

14. Accordingly, the Retirement Plan does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance.

15. As a result, Any part of the payment that represents earnings on the corpus of the trust will be included in your assessable income under section 97 and subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

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

CGT implications of receipt of lump sum

Non-resident taxpayer

1. Under section 855-10 of ITAA 1997, a non-resident resident is liable to CGT in Australia in respect of taxable Australian property. Specifically, a non-resident will disregard a capital gain or capital loss from a CGT event if the event happens in relation to a CGT asset that is not taxable Australian property. Taxable Australian property includes:

● real property situated in Australia (including a leasehold interest in land);

● indirect interest in real property;

● an asset used in the carrying on a business though a permanent establishment in Australia;

● an option or right to acquire any of the above listed CGT assets; or

● assets covered by CGT event I1 (which is about ceasing to be a resident) if the taxpayer chooses to defer the CGT liability under section 104-165.

2. The trustee of a foreign trust for CGT purposes does not include in the net income of the trust a capital gain from a CGT event happening to a CGT asset which is not taxable Australian property. Further, the amount is not treated as a capital gain of the trust’s beneficiaries.

Resident taxpayer

3. Section 118-305 of the ITAA 1997 provides that a capital gain or capital loss is disregarded if it is made from a CGT event happening in relation to a right to an allowance, annuity or capital amount payable out of a ‘superannuation fund’ as defined in section 995-1 of the ITAA 1997.

4. A foreign superannuation fund qualifies as a ‘superannuation fund’ for the purposes of section 118-305 as one of the requirements of a ‘foreign superannuation fund’ is that it be a ‘superannuation fund’ as defined in section 995-1 of the ITAA 1997. As the Retirement Plan in this case is not a foreign superannuation fund, it will be deemed a foreign trust (as outlined above).

5. Where a foreign trust has a CGT event in relation to a CGT asset that is not taxable Australian property, the trustee disregards any capital gain from that event in calculating the net income of the trust. The trust's resident beneficiaries are not treated as having made capital gains and the amount will be included in the beneficiary's assessable income pursuant to subsection 99B(1) of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-305

Income Tax Assessment Act 1997 Section 295-95

Income Tax Assessment Act 1997 Section 305-60

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 885-10

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

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99B

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 62

Case law

Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519

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