Edited version of private advice

Authorisation Number: 1051800381314

Date of advice: 1 February 2021

Ruling

Subject: Foreign fund for the purpose of section 305-60

Question

Does the taxpayer's retirement plan meet the definition of a foreign pension fund for the purpose of section 305-60 of the Income Tax Assessment Act 1997 (ITAA 1936)?

Answer

No

This ruling applies for the following period:

Year ending 20XX and future years

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your client became a permanent resident of Australia in 20XX to the present date.

Your client participated in the Retirement Plan from 19XX to 20XX, while employed overseas.

The Retirement Plan is a defined benefit scheme that provides retirement benefits for eligible employees (and their eligible survivors and beneficiaries), it also provides disability and death benefits and, for certain members, a capital accumulation plan.

The Retirement Plan also allows inactive members (if they meet eligibility) to request a refund of their contributions plus any interest accumulated on those before retirement. A member may also request a refund of contributions before becoming and inactive member.

Your client intends to withdraw a lump-sum distribution from the Retirement Plan in 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection295-95(2)

Income Tax Assessment Act 1997 section305-60

Income Tax Assessment Act 1997 Subsection995-1(1)

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Summary

The Retirement Plan is not a foreign superannuation fund, therefore, section 305-60 of the ITAA 1997 does not apply in this instance.

Detailed reasoning

Lump sum payments from foreign superannuation funds

If a person receives a lump sum payment from a foreign superannuation fund within six months after the person becomes a resident of Australia, section 305-60 of the ITAA 1997 applies to exclude the applicable fund benefits from the person's assessable income.

Before determining whether an amount is not assessable under section 305-60 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund, then subsection 305-60 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 ...

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.

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 Superannuation Industry (Supervision) Act 1993 (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 accordance with section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for one or more of the 'core purposes'; or one or more of the 'core purposes' and one or more of the 'ancillary purpose', namely for the provision of benefits to a member on or after:

•         retirement from gainful employment; or

•         attaining a prescribed age; or

•         the member's death (this may require the benefits being passed on to a member's dependents or legal representative); or

•         the termination of member's employment with an employer who had, at any time, contributed to the fund in relation to the member; or

•         the member's cessation of work for gain or reward on account of ill-health.

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, the Retirement Plan details that members who have ceased employment with the employer can gain access to their accumulations (contributions) at any time, without having to reach a retirement age.

Therefore, the Retirement Fund does not meet the 'sole purpose test' and cannot be considered a 'superannuation fund' for Australian income tax purposes.

If the Retirement Plan is not a 'superannuation fund', it cannot be a 'foreign superannuation fund' for the purpose of, subsection 305-60 of the ITAA 1997.

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