Edited version of private advice

Authorisation Number: 1051805583663

Date of advice: 7 April 2021

Ruling

Subject: Payment from a foreign fund

Question 1

Is the International Personal Pension with General Accident Life a 'foreign superannuation fund' as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Are you assessable in respect to monies received when a life insurance policy matured after 10 years from commencement of risk?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

On XX/month/19XX, you invested into an 'International Personal Pension' in the UK (the Policy).

The policy allowed for a pension to be paid to you on reaching a certain age.

The policy also allowed for the value of the plan to be paid out if you died prior to the termination of the plan.

In 20XX, you received email notification that your 'investment' would terminate after your 75^th birthday.

In 20XX, XX years after your initial and only investment, you were paid an amount.

During the XX-year period, you have neither added nor withdrawn any monies from the initial investment.

At no time were you offered the option to take an annual drawdown in order to create an income stream.

You had the option to select a Pension Date which could have been at any time prior to your 75^th birthday but not earlier than 10 years after the commencement date.

The Pension Date the Policyholder nominates, if any, is not a binding Pension Date and the Policyholder may, by giving at least one month's notice choose any Pension Date provided such date is on or before the member's 75^th birthday.

If the Policyholder does not confirm a Pension Date, the Pension Date will be the day immediately preceding the member's 75^th birthday subject to at least one month but not more than 12 months' contrary notice from the Policyholder.

Relevant legislative provisions:

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6-10(4)

Income Tax Assessment Act 1997 section 10-5

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

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 subsection995-1(1)

Income Tax Assessment Act 1936 subsection 99B

Income Tax Assessment Act 1936 subsection 481(3)

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

Income Tax Assessment Act 1936 section 26AH

Income Tax Assessment Act 1997 section 118-300

Reasons for decision

Meaning of 'foreign superannuation fund'

A 'foreign superannuation fund' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (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 you can choose a date for the withdrawal of the amount in the plan as long as it is on or before your 75^th birthday, and not before 10 years after you commenced contributing.

As a result, because the benefits in the Policy can be withdrawn for purposes other than retirement, the Policy does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

Accordingly, the Policy 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.

Life insurance policy

Under the Life Insurance Act 1995, a 'life policy' includes but is not limited to:

•         a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;

•         a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life;

•         a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life.

•         a contract (whether or not it is a contract of insurance) that constitutes an investment account contract;

•         a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract.

Division 6 of the ITAA 1997 sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included:

•         income according to ordinary concepts; that is, ordinary income (section 6-5 of the ITAA 1997), or

•         an amount which is included by a specific provision about assessable income; that is, statutory income (section 6-10 of the ITAA 1997).

Taxation Ruling IT 2504 - income tax: deductibility of interest on borrowed funds - life assurance policies states that bonuses received from life insurance policies are not income according to ordinary concepts.

In your case, as the monies are not ordinary income, they will only be included in your assessable income if they are statutory income.

Section 26AH of the Income Tax Assessment Act 1936 (ITAA 1936) includes in assessable income certain bonuses received under short term life insurance policies and provides for the taxation of certain reversionary bonuses received under a relevant life assurance policy (an eligible policy) during a specified period (the eligible period).

Reversionary bonuses are paid on maturity of the life assurance policy. They can also be paid when policies are partially surrendered. The effect of section 26AH of the ITAA 1936 is that for policies taken out after 27 August 1982, the full reversionary bonus is assessable if it is received in the first eight years, two-thirds of the bonus if received in the ninth year and one-third of the bonus if received in the tenth year.

Reversionary bonuses received more than ten years from the date of commencement of risk do not fall within the operation of section 26AH of the ITAA 1936 and are not included in the assessable income.

Taxation Ruling IT 2346 - income tax: bonuses paid on certain life assurance policies - section 26AH - interpretation and operation discusses the application of section 26AH of the ITAA 1936 to short-term life assurance policies.

Bonuses received under life insurance policies are not assessable under section 26AH of the ITAA 1936 if the policy has been held for a minimum of 4 or 10 years, depending on whether the date of commencement of risk is before or after 27 August 1982.

In the case of a policy for a term of 10 years or more, no liability to taxation arises if the policy holder does not exercise their right to early surrender or forfeiture and therefore allows the policy to run its full term. Therefore, bonus amounts received after the tenth year of the policy are not included on a tax return.

In your case, a bonus received from your policy which was held for more than 10 years is not assessable under section 26AH of the ITAA 1936 and is not required to be included in your Australian income tax return.

Capital gains tax

Section 118-300 of the ITAA 1997 excludes from the application of the Capital Gains Tax (CGT) provisions certain capital gains or capital losses relating to the taxpayer's interests under insurance policies, in certain circumstances.

The CGT exemption applies to capital gains or losses from a CGT event relating to rights under life insurance policies or annuity instruments, if the taxpayer was the original beneficial owner of the policy or instrument.

As you were the owner of the policy, any capital gain or loss resulting from the maturity of the policy is disregarded under Item 3 of section 118-300 of the ITAA 1997.

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