Edited version of private advice

Authorisation Number: 1051478271190

Date of advice: 13 June 2019

Ruling

Subject: Lump sum payments from foreign superannuation funds

Is any part of the lump sum received by a person (the Taxpayer) from (the Fund) assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the Taxpayer's foreign pension assessable income?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

·        the Taxpayer joined the Fund while working overseas for the Employer

·        the Taxpayer elected to a withdrawal settlement in line with funds regulations along with a retirement pension payment and separated from service with the employer

·        the taxpayer passed away in Australia and amount become payable to the estate.

·        The Taxpayer was an Australian citizen who resided overseas and only returned to Australia to visit.

·        the Fund released the full amount representing the withdrawal settlement to the executor of the estate.

the estate received from the Fund:

·        a lump sum payment of trust account; and

·        the estate advised that payments were made to the children of the deceased taxpayer.

No contributions or transfers have been made to the estate since the withdrawal settlement was approved

The Taxpayer is unable to provide the total value of their interest in the Fund after the lump sum payment was made.

The benefits in the Fund can only be withdrawn in the following circumstances:

·        the member retires on or after 60 years of age;

·        the member separates from employment between 55 and 60 years of age;

·        in the case of permanent mental or physical disability;

·        in the case of the member's death; or

·        the member leaves the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5

Income Tax Assessment Act 1997 Subsection 6-5(2)

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

Income Tax Assessment Act 1997 Section 305-60

Income Tax Assessment Act 1997 Subsection 305-60(1)

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

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

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.

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.

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

Provident, benefit, superannuation or retirement fund

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'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 SIS Act, 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 SIS Act applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and the SIS Regulations) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

Based on the rules of the Fund, benefits are only paid to members on retirement and therefore the fund would meet the definition of superannuation fund. Therefore, as the payer of the lump sum was established outside of Australia and has its central management and control outside of Australia, the Commissioner accepts that the lump sum payment was made from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Lump sums tax free - foreign resident period

Section 305-60 of the ITAA 1997 provides that a lump sum payment you receive from a foreign superannuation fund is not assessable income and is not exempt income if all the following conditions are met:

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 Australian 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.

Section 307-15 of the ITAA 1997 applies to treat a superannuation lump sum as received by you when it is made (a) for your benefit, or (b) to another person or to an entity at your direction or request.

For section 305-60 of the ITAA 1997 to apply, each of the requirements specified in paragraphs (a), (b) and (c) of that section must be satisfied.

Payment received from the Fund

The Taxpayer was an Australian Citizen but not an Australian resident for tax purposes, therefore, to satisfy the six month condition in paragraph 305 60(a) of the ITAA 1997, the Taxpayer must have received the superannuation lump sum payment from the Fund during a 6 month period after they became an Australian resident.

As the taxpayer did not receive the payment within 6 months of becoming an Australian resident, they failed the requirement in paragraph 305-60(a) of the ITAA 1997. Therefore, section 305-60 of the ITAA 1997 does not apply to treat the payment as tax free.

Other relevant comments

As stated in paragraph 9 above, for section 305-60 of the ITAA 1997 to apply, each of the requirements specified in paragraphs (a), (b) and (c) of that section must be satisfied. Therefore, even if paragraph (a) was satisfied in this case, the payment would fail paragraph (b) because the payment relates to a period when they were a non-resident.

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