Edited version of private advice

Authorisation Number: 1051541529185

Date of advice: 5 July 2019

Ruling

Subject: Lump sum payment from a foreign superannuation form

Question 1

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

Answer

No

Question 2

Will any part of the lump sum payment from the Overseas Fund be included in the Taxpayer's assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 3

Will the premiums paid from the Overseas Fund for an insurance investment affect the calculation of the assessable income in relation to the lump sum payment?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer became a resident of Australia for tax purposes over ten years ago.

While living and working overseas, the Taxpayer became a member of the Overseas Fund.

The Overseas Fund is a government managed fund and all workers must contribute to the Fund with some exceptions.

Withdrawals from the Overseas Fund are permitted in the following circumstances:

·         Upon the death of the member.

·         Upon the retirement of the member.

·         In the event that the member is physically or mentally incapacitated.

·         In the event that the member is suffering from a terminal illness or a medical condition that severely impairs life expectancy.

·         To make a payment towards the purchase or acquisition of a property or to repay or make a repayment towards the purchase or acquisition of a property.

·         For the payment of tuition fees at approved educational institutions.

Between 20XX and 20XX, the Taxpayer withdrew funds from the Overseas Fund to invest in public housing property.

Throughout their period of residency, the Taxpayer paid premiums to an insurance fund for two policies.

The yearly premium for the first policy has been provided.

The yearly premium for the second policy has been provided.

Less than XX years ago, the Taxpayer became a citizen of Australia and renounced their overseas citizenship. Consequently, the Overseas Fund requested the Taxpayer's bank details in order to pay out the money in the fund.

In the 20XX-XX income year, the Taxpayer received a lump sum payment of into their Australian bank account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income tax Assessment Act 1936 Section 99B

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

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 section 305-60

Income Tax Assessment Act 1997 subsection 305-75(2)

Income Tax Assessment Act 1997 subsection 305-75 (3)

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

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

Superannuation Industry (Supervision) Act 1993 section 62

Question 1

Summary

The Overseas Fund does not satisfy the meaning of 'superannuation fund' under subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SISA). Accordingly, the Overseas Fund is not a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

As the Overseas Fund is not a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997, any lump sum payment from the Overseas Fund will not be subject to applicable fund earnings rules.

Detailed reasoning

Subdivision 305-B of the ITAA 1997 deals with the tax treatment of superannuation benefits paid from certain foreign superannuation funds.

In accordance with section 305-60 of the ITAA 1997, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income.

If a person received a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable income.

Before any applicable fund earnings can be calculated, it must first be determined whether the US Fund is a 'foreign superannuation fund'. If the entity making the payment is not a foreign superannuation fund then subsection 305-70(2) will not have any application.

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 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 Overseas Fund also provides benefits for purposes such as:

                       i.          to pay medical costs incurred by the Participant, including medical insurance and hospitalisation expenses;

                      ii.          to purchase the Participants home; or

                     iii.          to pay education expenses.

Because the benefits in the Overseas Fund are also paid for other than retirement purposes, the Overseas Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

Accordingly, the Overseas Fund 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.

Questions 2 and 3

Summary

As the Taxpayer received an amount from a foreign trust while they were a resident of Australia for tax purposes, that amount is subject to taxation under section 99B of the ITAA 1936.

The amount that is included in assessable income under section 99B of the ITAA 1936 is reduced by so much of the amount that represents corpus of the trust that is not accumulated income (for example, contributions by the Taxpayer and their employer/s) and so much of the amount that was previously assessable under the former Foreign Investment Fund (FIF) provisions.

The premiums previously paid out of the fund for an insurance investment do not affect the calculation of the assessable income in relation to the lump sum payment under section 99B of the ITAA 1936.

Detailed reasoning

The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia (sections 6-5 and 6-10 of the ITAA 1997).

Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997).

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

The payments from the Taxpayer's Overseas fund are not assessable as ordinary income.

However, the overseas fund is a foreign trust for taxation purposes.

Statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law (section 6-10 of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is trust income derived pursuant to section 99B of the ITAA 1936.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, the amount is to be 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 beneficiary's income under section 97 of the ITAA 1936 (subparagraph 99B(2)(c)(i) of the ITAA 1936).

Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to 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).

Whether income accumulated by the foreign trust while the taxpayer was a non-resident is assessable under section 99B was considered by ATO Interpretative Decision 2011/93 Income Tax- Application of section 99B of the Income Tax Assessment Act 1936 when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income.

The ATO ID states:

It is clear from the language of section 99B of the ITAA 1936, and by inference from subsection 102AAM(5) of the ITAA 1936, that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust. Rather, the only explicit condition concerning residency is that the beneficiary be a resident at some time during the year of income in which the trust property is paid to them or applied for their benefit.

The ATO ID concludes that the amount included in assessable income under section 99B of the ITAA 1936 is not reduced by so much of the amount that represents income accumulated by the foreign trust prior to the taxpayer becoming a resident of Australia for tax purposes.

Where the previous FIF provisions applied in prior years to include amounts in relation to the foreign trust in the taxpayer's assessable income then those amounts are excluded from being included in assessable income again (paragraph 23AK(9)(f) of the ITAA 1936). The FIF provisions would have been applicable from when the taxpayer became a resident of Australia for tax purposes until the FIF provisions ceased application on 30 June 20XX.

The present case

In the present case, the Taxpayer received a lump sum payment from the Overseas Fund during the 20XX-XX income year. As the Taxpayer is an Australian resident and received a distribution/withdrawal from a foreign trust, the amount from the fund would be assessable to the Taxpayer under subsection 99B(1) of the ITAA 1936.

However, the amount assessable under subsection 99B(1) of the ITAA 1936 is reduced by the amounts listed in subsection 99B(2) of the ITAA 1936. The portion that represents amounts deposited by the Taxpayer and their employer/s would be corpus and come within paragraph 99B(2)(a) of the ITAA 1936 and therefore be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936.

Also, any amounts that, due to the operation of the former FIF provisions, formed part of the Taxpayer's assessable income from when the Taxpayer became a resident until 30 June 2010, are excluded from being assessable income under section 99B of the ITAA 1936.

To summarise, the amount included in the Taxpayer's assessable income for the 20XX-XX income year under section 99B of the ITAA 1936 is the lump sum received less the portion of the lump sum that represents the Taxpayer's and their employer/s' contributions into the fund and less any amounts previously assessable under the former FIF provisions.

The premiums previously paid out of the fund for an insurance investment do not affect the calculation of the assessable income in relation to the lump sum payment under section 99B of the ITAA 1936.

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