Edited version of private advice

Authorisation Number: 1052378157692

Date of advice: 2 May 2025

Ruling

Subject: Deductions

Question 1

Is the pension fund situated in Country X a 'foreign superannuation fund' as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the compulsory contributions you make to the foreign pension fund deductible from your assessable income under Division 290 of the ITAA 1997?

Answer

No.

Question 3

Are the compulsory contributions you make to the foreign pension fund deductible from your assessable income under section 8-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a dual citizen of Australia and Country X living and working in Australia.

You have a professional qualification in Country X that allows you to work in your field of expertise.

You are working for the Australian branch of a Country X based entity in Australia.

As a result of your qualification in Country X, you are required to make contributions to a Country X pension fund.

You make the compulsory contributions to the foreign pension fund from the after-tax salary you derive from your Australian employment.

If you were living and working in Country X, any contributions to the fund would be tax deductable under Country X taxation law.

Any future payments from the pension fund after you reach retirement age will be subject to tax in Country X.

The amount of the old-age pension is determined by the entitlements acquired through the payment of contributions (compulsory contributions, voluntary additional payments).

Pension payments are paid exclusively in the form of a pension. A lump-sum settlement or a lump-sum option is not possible.

The information booklet for the Country X pension fund provides that the benefits of the fund can only be withdrawn by members under the following circumstances:

•                     a member chooses early retirement

•                     the member retires or dies

•                     the member can no longer work because they are permanently incapacitated.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 290

Income Tax Assessment Act 1997 section 290-10

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

Income Tax Assessment Act 1997 section 305-55

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

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

Retirement Savings Accounts Act 1997

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 40

Superannuation Industry (Supervision) Act 1993 section 45

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Question 1

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.

Subsection 295-95(2) of the ITAA 1997 provides that 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.

A superannuation fund that is established, managed or controlled outside of Australia or has all of its assets 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.

Section 305-55 of the ITAA 1997 also provides for a lump sum benefit payment (that is not a pension payment) made from a foreign retirement scheme (that provides retirement benefits 'in the nature of superannuation') to receive the same tax treatment as a superannuation lump sum paid from a foreign superannuation fund. However, the conditions in subsection 305-55(2) must be met, including:

•                     the scheme was not established in Australia; and

•                     the scheme is not centrally managed or controlled in Australia.

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 the meaning of superannuation fundas follows:

•                     a fund that:

-                    is an indefinitely continuing fund; and

-                    is a provident, benefit, superannuation or retirement fund; or

•                     a public sector superannuation scheme.

Meaning of 'provident, superannuation or retirement fund'

Whether the Fund is a foreign superannuation fund requires consideration of the meaning of the term 'provident, benefit, superannuation or retirement fund' in subsection 10(1) of the SISA. Each of these terms are not defined in the ITAA 1936, ITAA 1997, the SISA or elsewhere in the tax acts. Accordingly, those terms will derive their meaning from their ordinary meaning and the relevant case law.

In the context of considering the term 'provident, benefit or superannuation fund established for the benefit of employees', in former subparagraph 23(j)(i) of the ITAA 1936, the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony) considered that this phrase denoted 'a purpose narrower than the conferral of benefits in a completely general sense' and had to be characterised by 'some specific future purpose'. In the case of a provident fund, against 'contemplated contingencies; in the case of a superannuation fund 'on retirement, death or cessation of employment'; and, in the case of a benefit fund 'a benefit characterised by some specific future purpose' (e.g. a funeral fund).

Furthermore, Justice Kitto's judgement in Mahony indicated that a fund does not satisfy any of the three provisions, that is, either a 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'.

A similar approach was also adopted by Taylor J and Windeyer JJ in Mahony who said:

...In other words, if they could, keeping within the terms of the trust, apply the fund or any portion thereof to purposes foreign to the true purposes of such a fund, then it would not be such a fund.

Accordingly, the purpose of the fund must be solely consistent with it being a 'provident, benefit or superannuation fund'. Similar observations have been made in a number of other authorities.

In the context of what constitutes a 'superannuation fund' and a 'fund', Justice Windeyer in Scott v. Federal Commissioner of Taxation (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333emphasised the 'sole purpose' requirement, stating:

...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.

More recently, in considering the term 'provident, benefit, superannuation or retirement fund' as it now appears in the definition of 'superannuation fund' in subsection 10(1) of the SISA, Senior Member FD O'Loughlin in Baker v. FC of T [2015] AATA 469 (Baker) stated at [16]:

Accordingly, a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund.

Whilst the Senior Member in Baker made reference to 'benefits not permitted by the Supervision Act' in the context of considering whether a particular fund which was not a 'provident, benefit or retirement fund' was a 'superannuation fund', it is noted that section 62 of the SISA largely replicates the relevant case law and requires the fund be 'maintained solely' for one or more of the 'core purposes' of providing benefits to a member when the events occur:

•                     on or after retirement from gainful employment;

•                     attaining a prescribed age; or

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

Whether a fund has been established for the requisite purpose required, is determined by considering the terms of the trust deed. This is an objective determination, and it is not determined by the subjective intentions of the parties. Whether a particular arrangement constitutes a superannuation fund is dependent upon the facts and circumstances of the case. Regard is had to the terms of the constituent arrangements and what the relevant trustee can and cannot do, and is and is not obliged to do, with the trust assets and property. As Taylor and Windeyer JJ observed in Mahony:

It thus becomes necessary to look carefully and critically at the terms of the trust deed, at what is required and what is permitted - that is to say in what ways the trustees might, without any breach of the trusts it imposes, apply the trust property.

Conclusion

In this case, the information booklet for the foreign pension fund, provides that the benefits of the fund can only be withdrawn by members under the following circumstances:

•                     a member chooses an early retirement

•                     the member retires or dies

•                     the member can no longer work because they are permanently incapacitated.

As the benefits in the fund are paid only for retirement purposes, the foreign pension fund satisfies the requirements of being a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Question 2

Deductibility of contributions made to a superannuation fund - Division 290 of the ITAA 1997

Division 290 of the ITAA 1997 contains the Australian domestic law provisions relating to the deductibility of contributions made to superannuation funds.

Section 290-10 of the ITAA 1997 provides that an individual taxpayer may only claim a deduction for contributions made to a 'complying superannuation fund' or 'RSA'.

Section 45 of the SISA states that a fund is a complying superannuation fund for the purposes of the ITAA 1997 if, and only if, the Regulator has given a notice to a trustee of the fund under section 40 of the SISA stating that the fund is a complying superannuation fund in relation to the current year of income or a previous year of income.

RSA (retirement savings account) has the meaning given by the Retirement Savings Accounts Act 1997:

•                     An RSA is an account or a policy that is provided by an entity that is an RSA institution at the time the account is opened or the policy is issued (section 8).

•                     Only an authorised deposit-taking institution (ADI) or a life insurance company or a prescribed financial institution can be approved as an RSA institution (section 11).

In your case, you make compulsory contributions to a foreign pension fund that is a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

However, there is no evidence to say that the fund is a 'complying superannuation fund' as specified in section 45 of the SISA. Further, it is evident that the fund is not an RSA.

Therefore, the compulsory contributions you make to the foreign pension fund from your assessable income are not deductible under Division 290 of the ITAA 1997.

Question 3

Deductibility of contributions made to a superannuation fund - Section 8-1 of the ITAA 1997

Section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income.

However, an individual is not entitled to deduct any loss or outgoing under section 8-1 to the extent that:

•                     it is an outgoing of capital or of a capital nature

•                     it is an outgoing of a private or domestic nature

•                     it is incurred in gaining or producing a taxpayer's exempt or non-assessable, non-exempt income, or

•                     a provision of the Act prevents it from being deducted

Expenditure will be deductible if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income: Lunney v. Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404 at CLR 498-499; ATD 412-413.

The characterisation of particular expenditure is by its nature a question of fact. It involves an enquiry about what the expenditure was for and what it was intended to achieve in relation to the taxpayer's income earning activities or business from a practical and business point of view: Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) 49 FLR 183; 80 ATC 4542; (1980) 11 ATR 276 (Magna Alloys) at ATC 4549 and 4551; ATR 284 and 287 and Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190 at CLR 648; ATD 196. If the advantage to be gained by the expenditure is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Ordinarily, the objective circumstances that gave rise to the expenditure would be expected to provide a clear explanation of the benefit intended to be achieved by the expenditure and thereby its essential character. As Dixon J pointed out in Robert G Nall Ltd v. Federal Commissioner of Taxation (1936) 57 CLR 695; (1936) 4 ATD 335 (Robert G Nall) at CLR 712; ATD 342, '...the circumstances of the transaction must give it the complexion of money laid out in furtherance of a purpose of gaining income'......... this has been interpreted as meaning that the expenditure must be incurred in circumstances where it is 'conducive to the gaining or producing of assessable income or to the carrying on of a business by the taxpayer' (Magna Alloys at ATC 4549; ATR 284).

Expenditure is 'conducive' to the production of assessable income or the conduct of a business to produce such income where it is 'incidental and relevant' to the gaining of the income or reasonably capable of being seen as 'desirable or appropriate' in the pursuit of the business ends of the business (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431 (Ronpibon) at CLR 56-57; ATD 435; Magna Alloys at ATC 4560-4561; ATR 296-297).

Application to your circumstances

In your case, you work in Australia for the Australian office of a Country X entity and are required to make compulsory contributions to the Country X pension fund from your after-tax salary. The contributions are required as a result of you obtaining your professional qualification in Country X and being able to practice in your field of expertise.

It is considered that the contributions are not outgoings you have incurred in the course of gaining or producing your assessable employment income because the contributions do not have a sufficient connection with the activities that produce your assessable income. This is because:

•                     the contributions are not expenses that assist you in carrying out the day-to-day duties of your employment, unlike, for example, incurring costs in using your motor vehicle to visit clients or using your personal mobile phone for work purposes;

•                     the contributions are a mandatory requirement under Country X law that apply to all people with your particular qualification and they have to be paid by you regardless of who you are employed with as a XXXX and

•                     the benefit intended to be achieved by the expenditure is to fund your retirement by receiving a pension from the pension fund in the future.

Therefore, the compulsory contributions you make to the foreign pension fund are not deductible from your assessable income under section 8-1 of the ITAA 1997.

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