Edited version of private advice

Authorisation Number: 1051574448704

Date of advice: 2 September 2019

Ruling

Subject: Foreign lump sum

Question 1

Is your overseas retirement account a foreign superannuation fund or scheme covered by section 305-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will any part of the payment withdrawn from your overseas retirement account be included in your assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 3

Will you be assessed for the interest imposed by section 102AAM of the ITAA 1936 on the section 99B amounts paid to, or applied for your benefit?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You have been a resident of Australia for tax purposes since 2016.

Your relative owned a retirement account in a foreign country.

You were a beneficiary of your relative's retirement account.

An overseas retirement account was opened for you in late 2017, and the balance of your relative's retirement account was transferred into your overseas retirement account and vested in you.

You withdrew your entire interest in your overseas retirement account.

Between the time when your overseas retirement account was opened and when the money was transferred to your bank account, the account had increased in value.

In the first quarter of 2018 an amount was transferred to an Australian bank account from your overseas retirement account.

In the second quarter of 2018 a small residual amount was transferred to an Australian bank account from your overseas retirement account.

You provided information regarding the terms and conditions relating to your overseas retirement account.

Your overseas retirement account was established in the foreign country and the custodian is based in the foreign country.

Withdrawals from your overseas retirement account can be made at any time, however, additional tax may be payable on withdrawals made prior to a certain age.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 section 102AAM

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 295-95.

Income Tax Assessment Act 1997 section 305-55.

Income Tax Assessment Act 1997 section 305-70.

Income Tax Assessment Act 1997 section 995-1.

Superannuation Industry (Supervision) Act 1993 section 10.

Reasons for decision

Summary

Your overseas retirement account is not a foreign superannuation fund or a scheme for the payment of benefits in the nature of superannuation upon retirement or death.

We consider your overseas retirement account took on the form of a trust. The initial corpus of this trust account is not assessable income as it was sourced from a deceased relative's retirement account. However the growth on your trust account is assessable as income in Australia, and the assessable amount is subject to an interest charge.

Detailed reasoning

Foreign superannuation fund

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

If a person receives 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.

Subsection 305-55(2) of the ITAA 1997 extends the operation of subdivision 305-B to payments (excluding pensions) from foreign schemes for the payment of benefits in the nature of superannuation upon retirement or death.

Before any applicable fund earnings can be calculated, it must first be determined whether your overseas retirement account is:

·      a foreign superannuation fund; or

·      a foreign scheme for the payment of benefits in the nature of superannuation upon death or retirement.

If your overseas retirement account is neither of the above then section 305-70 of the ITAA 1997 will not have any application.

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.

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, 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 phrase 'a provident, benefit, superannuation or retirement fund' is not defined in the legislation.

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No.2) (1966) 10 AITR 290; (1966) 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 benefits of its employees except that it must be 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 Mahoney v Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahoney). 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.

The terms and conditions of your overseas retirement account allow for withdrawals to be made at any time. Accordingly, your overseas retirement account is not:

·      a foreign superannuation fund; or

·      a foreign scheme for the payment of benefits in the nature of superannuation upon death or retirement.

Therefore, section 305-70 of the ITAA 1997 does not apply to the lump sum payment you received from your overseas retirement account.

Assessable income

It has been determined above that your overseas retirement account is not a superannuation fund for the purposes of the ITAA 1997. Therefore, as an Australian resident, you will be subject to the general tax rules applicable to your circumstances, in this case the general tax rules relating to trust income.

Trust income

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.

Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, a person's assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.

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 and 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 initial account deposit (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 (paragraph 99B(2)(c) of the ITAA1936).

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).

Interest

An Australian resident may be liable to interest under the Taxation (Interest on Non-resident Trust Distributions) Act 1990, where their assessable income includes an amount from non-resident trust assessed under section 99B of the ITAA 1936.

Subsection 102AAM(1) of the ITAA 1936 may make a taxpayer liable to pay interest to the Commissioner, on distributions from certain non-resident trust estates.

The interest is calculated on the following amount:

(distributed amount × applicable rate of tax) - FTC

·      "Distributed amount" is the amount included in assessable income of the taxpayer under section 99B of the ITAA 1936 and grossed up by any foreign tax in respect of the distribution.

·      "Applicable rate of tax" is maximum rate of tax payable by the taxpayer.

·      "FTC" is the foreign tax credit which is attributable to the amount of the distribution included in the taxpayer's assessable income.

The rate of interest is the GIC rate fixed under Section 8AAD of the Taxation Administration Act 1953 less seven percentage points.

For information on current GIC rates applicable to your circumstances go to www.ato.gov.au and enter quick code QC 16145 in search.

Application to circumstances

In this case, you withdrew all your funds from your overseas retirement account. Your overseas retirement account was holding and investing contributions for your benefit; we therefore consider it took on the form of a trust.

The initial deposit into the account from your relative's estate is corpus of your overseas retirement account and will not be included in your assessable income in accordance with subsection 99B(2) of the ITAA 1936.

However, any amount in addition to the original deposit that is withdrawn from your overseas retirement account will be assessable and may attract interest.

Other information - converting foreign currency

For information on converting amounts from foreign currency to Australian Dollars go to www.ato.gov.au and enter quick code QC 16583 in search.

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