Edited version of private advice

Authorisation Number: 1052314462243

Date of advice: 28 October 2024

Ruling

Subject:Lump sum payments

Question

Will any withdrawals made from a foreign trust be assessable in Australia under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

On DD MM 20XX, you became an Australian citizen.

You were a resident of a foreign country for tax purposes and maintained a foreign trust (the fund). In MM 20XX, you made your final contribution to the foreign trust upon resigning from your previous employer.

Your foreign trust allows you to make a withdrawal of all or part of your plan at any time, although penalties apply if withdrawn before the age of XX.

Your foreign trust allows you to withdraw your money as follows:

•                     If your account balance is more than $XX, and you decide to take a distribution, you have the following options:

o        Lump Sum Distribution (with or without rollover).

o        Partial Distribution (with or without rollover).

o        Instalment Payments: monthly, quarterly, semimanual, or annual instalment payments in a fixed dollar amount over a number of years (up to 10) specified by you.

o        Annuity purchase.

Your foreign trust allows the following distribution delivery options:

•                     Regular mail

•                     Expedited delivery

•                     Direct deposit

On DD MM 20XX, you received a lump sum payment from your foreign trust. XX percent was withheld upfront for the foreign country taxes, and you are likely to owe more when you file your foreign country tax return.

On DD MM 20XX, you received the funds in your bank account in the amount of $XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1997 subdivision 995-1

Internation Tax Agreements Act 1953

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Question

Will any withdrawals made from a foreign trust be assessable in Australia under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

As the fund does not meet the definition of a foreign superannuation fund, the superannuation legislation will not apply to any withdrawals made from the foreign trust.

The fund will be treated as a foreign trust under section 99B of the ITAA 1936 because it does not meet the definition for a foreign superannuation fund. Section 99B of the ITAA 1936 deals with the receipt of trust income 'not previously subject to tax' in Australia and applies where an Australian resident taxpayer receives a lump sum payment from a foreign retirement or investment fund.

Therefore, subsection 99B(1) of the ITAA 1936 will operate to include the amount an Australian resident taxpayer receives from a foreign trust fund in their assessable income.

Detailed reasoning

Foreign superannuation fund

Section 995-1 of the ITAA 1997 defines a 'foreign superannuation fund' as being a fund that is not an Australian superannuation fund. A 'superannuation fund' has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), 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 term 'superannuation fund' has been examined extensively by the High Court. 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. 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.

In section 62 of the SISA, 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).

It is therefore the Commissioner's view 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.

In this instance, the foreign trust allows monetary withdrawals to be made in circumstances which include the following:

•                     from age XX total benefits may be withdrawn without restriction or penalty;

•                     total benefits may be withdrawn at or after age XX provided the member has terminated employment with an employer;

•                     total benefits may be withdrawn upon termination of employment; and

•                     after tax contributions may be withdrawn without restriction.

In respect to the foreign trust, benefits may be withdrawn at any time, although penalties apply if withdrawn before the age of XX.

In this case, the foreign trust does not ultimately provide the narrow range of benefits required by the definition of a superannuation fund for Australian purposes. As the fund may be accessed for pre-retirement purposes, it does not meet the 'sole purpose test' and therefore cannot be considered to be a 'superannuation fund' for the purposes of the SISA.

Therefore, any payments made from the funds will not be considered to be paid from a 'foreign superannuation fund' as defined in section 995-1 of the ITAA 1997 and instead will be payments from a foreign trust.

Section 99B of the ITAA 1936 deals with the receipt of trust income 'not previously subject to tax' in Australia and applies where an Australian resident taxpayer receives a lump sum payment from a foreign retirement or investment fund.

Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust who was a resident at any time during the year of income, the amount is to be included in the assessable income of the beneficiary.

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