Edited version of private ruling

Authorisation Number: 1011782844190

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Ruling

Subject: Employer contributions to an overseas superannuation fund

Questions:

1. Will contributions made by an Australian employer in the 2010-11 income year into a foreign pension scheme be counted towards the taxpayer's concessional contributions cap?

2. Will contributions made by an Australian employer in the 2010-11 income year into a foreign pension scheme be counted towards the taxpayer's non-concessional contributions cap?

3. Will the taxpayer be subject to tax under Australian income tax legislation for the contributions made by an Australian employer into a foreign pension scheme in the 2010-11 income year?

Advice/Answers:

1. No.

2. No.

3. No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts:

Your client is under 60 years of age and is a citizen of a foreign country.

While working in the foreign country your client joined an employer sponsored superannuation fund in the foreign country.

Your client arrived in Australia on a temporary migration visa, on secondment from his foreign employer to their Australian affiliate company for a period of two years.

Your client commenced working for the Australian company.

The value of the total benefits your client holds in the overseas superannuation fund and other foreign policies is more than $50,000.

The Australian company is now considering paying an amount into your client's overseas superannuation fund.

The amount was to be paid in 24 equal monthly instalments.

Assumptions:

None.

Relevant legislative provisions:

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Section 290-10
Income Tax Assessment Act 1997 Section 290-75
Income Tax Assessment Act 1997 Section 292-20
Income Tax Assessment Act 1997 Subsection 292-20(1)
Income Tax Assessment Act 1997 Section 292-25
Income Tax Assessment Act 1997 Subsection 292-25(2)
Income Tax Assessment Act 1997 Section 292-85
Income Tax Assessment Act 1997 Section 292-90
Income Tax Assessment Act 1997 Section 295-160
Income Tax Assessment Act 1997 Section 295-185
Income Tax Assessment Act 1997 Subdivision 305B
Income Tax Assessment Act 1997 Section 768-910
Income Tax Assessment Act 1997 Section 995-1
Superannuation Industry (Supervision) Act 1993 Section 10
Superannuation Industry (Supervision) Act 1993 Section 45
Superannuation Guarantee (Administration) Act 1992 Paragraph 27(1)(d)
Superannuation Guarantee (Administration) Act 1992 Paragraph 27(1)(e)
Taxation Administration Act 1953 Section 16-182

Reasons for decision

Summary

Contributions made by the Australian employer to the foreign pension fund (foreign Fund) do not count towards your client's concessional or non-concessional contributions caps as the contributions are not made to a complying superannuation fund.

Similarly, your client will not be subject to tax in Australia on their employer's contributions to the foreign Fund.

Detailed reasoning

Concessional contributions

Section 292-20 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with excess concessional contributions.

The amount of a person's concessional contributions for a financial year is determined under section 292-25 of the ITAA 1997.

Subsection 292-25(2) of the ITAA 1997 states:

A contribution is covered under this subsection if:

(a) it is made in the financial year to a complying superannuation plan in respect of you; and

(b) it is included in the assessable income of the superannuation provider in relation to the plan; and

(c) it is not any of the following:

(i) …

Therefore subsection 292-25(2) of the ITAA 1997 provides that concessional contributions must be made to a complying superannuation plan by or for a person in that year.

Non-Concessional contributions

Section 292-85 of the ITAA 1997 deals with excess non-concessional contributions for a financial year.

Non-concessional contributions are defined in section 292-90 of the ITAA 1997 and include the amount of a person's excess concessional contributions for the financial year.

Section 292-90 of the ITAA 1997 states the following:

(1) The amount of your non-concessional contributions for a financial year is the sum of:

(a) each contribution covered under subsection (2); and

(aa) each amount covered under subsection (4); and

(b) the amount of your excess concessional contributions (if any) for the financial year.

(2) A contribution is covered under this subsection if:

(a) it is made in the financial year to a complying superannuation plan in respect of you; and

(b) it is not included in the assessable income of the superannuation provider in relation to the superannuation plan, or, by way of a roll-over superannuation benefit, in the assessable income of any complying superannuation fund or RSA provider in the circumstances mentioned in subsection 290-170(5) (about successor funds); ...

Therefore subsection 292-90(2) of the ITAA 1997 also provides that non-concessional contributions must be made to a complying superannuation plan by or for a person in that year.

A complying superannuation plan is defined in section 995-1 of the ITAA 1997 as:

complying superannuation plan  means:

(a) a complying superannuation fund; or

(b) a public sector superannuation scheme that is:

(i) a regulated superannuation fund (within the meaning of section 10 of the Superannuation Industry (Supervision) Act 1993); or

(ii) an exempt public sector superannuation scheme (within the meaning of section 10 of that Act); or

(c) a complying approved deposit fund; or

(d) an RSA.

A complying superannuation fund is defined in section 995-1 of the ITAA 1997 as:

complying superannuation fund means a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993.

Subsection 45(1) of the Superannuation Industry (Supervision) Act 1993 (SISA) states:

A fund is a complying superannuation fund for the purposes of the Income Tax Assessment Act in relation to a year of income (the current year of income) if, and only if:

(a) the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to the current year of income; or

(b) the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to a previous year of income and has not given a notice to a trustee of the fund under that section stating that the fund was not a complying superannuation fund in relation to:

(i) the current year of income; or

(ii) a year of income that is:

(A) later than that previous year of income; and

(B) earlier than the current year of income.

Clearly, your client's fund in the foreign country is not a complying superannuation plan as it would not have received a notice of compliance under subsection 45(1) of the SISA because it is not subject to the rules applying to superannuation funds in Australia. It is also not an Australian public sector superannuation scheme.

Therefore any contributions made to the foreign fund will be neither concessional nor non-concessional contributions of your client. Consequently, the question of exceeding the two caps will not arise.

Taxation under Australian income tax legislation

Where a valid salary sacrifice arrangement is entered into to make superannuation contributions to a foreign superannuation fund, there is no effect on the taxable income of the employee.

The employer contributions to the foreign superannuation fund may be reportable employer superannuation contributions as defined in section 16-182 of the Taxation Administration Act 1953. This is because the contributions are being made to a 'superannuation fund' as defined in section 995-1 of the ITAA 1997 and section 10 of the SISA. This definition does not restrict itself to either complying or Australian superannuation funds, and so can include a foreign superannuation fund.

If your client has or has had or might reasonably be expected to have or have had the capacity to influence the size of the amount or the way it is contributed so that his assessable income is reduced, the employer contributions could be reportable employer superannuation contributions.

Reportable employer superannuation contributions may affect the deductibility of your client's personal superannuation contributions and/or other benefits such as tax offsets.

It should be noted, however, that where a resident of Australia receives a pension or a lump sum from a foreign superannuation fund, a part or all of the payments may be taxable in Australia. In respect of lump sum payments, this is under subdivision 305-B of the ITAA 1997. Where an Australian resident receives a pension from a fund in Country X, the pension will be taxable in Australia.

Salary sacrifice

The Commissioner has issued Taxation ruling TR 2001/10 titled, Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements (TR 2001/10). Please note that since this ruling was issued, some of the sections of the Income Tax Assessment Act 1936 (ITAA 1936) quoted in the ruling have been replaced with corresponding provisions in the ITAA 1997.

This ruling states the following regarding salary sacrifice arrangements (SSA) and fringe benefits tax (FBT):

19. ' Salary sacrifice arrangement' - in this Ruling, the term salary sacrifice arrangement means an arrangement under which an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value. The main assumption made by the parties is that the employee is then taxed under the income tax laws only on the reduced salary or wages and that the employer is liable to pay FBT, if any, on the benefits provided.

20. The type of benefits provided in SSAs by employers to employees includes superannuation contributions, the provision of motor vehicles and expense payment fringe benefits, such as payment of school fees, childcare costs or loan repayments.

21. ' Effective SSA' - an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

22. ' Ineffective SSA' - an ineffective SSA involves the employee directing that an entitlement to receive salary or wages that has been earned (see paragraph 23 of this Ruling) is to be paid in a form other than as salary or wages.

23. ' Entitlement to receive salary or wages that have been earned' - personal services remuneration arrangements usually provide that the employee is entitled to be paid salary or wages at fixed intervals when he or she has performed services for the employer over a fixed period. To the extent that services for that period have been performed, everything has been done by the employee in earning the entitlement to salary or wages. Personal services remuneration arrangements may also provide that the employee may become entitled to be paid salary or wages such as bonuses or commissions if particular events occur or conditions are satisfied. The condition precedent to earning such variable salary or wages is met when those events occur or those conditions are satisfied. An entitlement to be paid has been earned even if the employee will not be paid until a later time. For annual and long service leave, an entitlement to be paid salary or wages is earned as the leave accrues, being when the relevant qualifying period of service is completed.

...

34. Superannuation contributions made by an employer (who derives assessable income or is engaged in a business) under an effective SSA are properly considered as employer contributions to the superannuation fund or RSA for the purposes of the SGAA and sections 82AAC to 82AAF of the ITAA 1936. Superannuation contributions made by an employer (who does not derive assessable income or is not engaged in a business) under an effective SSA are properly considered as employer contributions to the superannuation fund or RSA for the purposes of the SGAA.

35. However, superannuation contributions made after 4:00 PM (by legal time in the Australian Capital Territory) on 30 June 2000 to non-complying superannuation funds are not deductible to the taxpayer that makes the contribution, as section 82AAE was repealed by Taxation Laws Amendment (Superannuation Contributions) Act 2001. As such contributions are not excluded from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA, the employer may have a FBT liability in relation to the making of the contributions to a non-complying superannuation fund.

A salary sacrifice arrangement is between the employer and employee. What entitlement the employer and employee agree to sacrifice is an arrangement between them and makes no difference to the effectiveness of the arrangement. However, in order to be an effective SSA the entitlement that is sacrificed must be an entitlement to be earned in the future by the employee.

Further issues for you to consider:

Employer issues

As discussed above, the foreign Fund is not a complying fund, and as explained in paragraph 35 of TR 2001/10, there may be tax consequences for an Australian employer paying salary sacrificed superannuation contributions into a non-complying superannuation fund.

Division 290 of the ITAA 1997 deals with contributions to superannuation funds. Section 290-10 of the ITAA 1997 operates to ensure that a deduction for superannuation contributions can only be claimed under this division.

An Australian employer is eligible to claim a deduction for superannuation contributions made for an employee to a complying superannuation fund (section 290-75 of the ITAA 1997). However, where an Australian employer contributes to a non-complying superannuation fund the employer will not be eligible to claim a deduction for those contributions. Consequently an employer will not be able to reduce their taxable income by the amount of those contributions.

Fringe Benefits Tax (FBT)

Paragraph (j) of the definition of a fringe benefit in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) specifically excludes a superannuation contribution made to a complying superannuation fund from being a fringe benefit. This exclusion does not extend to superannuation contributions made to non-complying superannuation funds.

However, employer contributions made to a foreign superannuation fund for a temporary resident are also exempt from fringe benefits tax under paragraph (j) of the definition of a fringe benefit in subsection 136(1) of the FBTAA.

If your client's employer is subject to FBT on superannuation contributions made to the foreign Fund, it will be a matter between your client and the employer as to whether any of the FBT payable is recouped from your client.

Superannuation fund issues

The contributions to the foreign Fund will not be taxed as income of a superannuation fund in Australia as the foreign Fund does not come under the tax regime of Australia.

Superannuation Guarantee (SG)

The Superannuation Guarantee (Administration) Act 1992 (SGAA) requires employers to provide a prescribed minimum level of superannuation support for their employees. However, there are certain exempt employees for whom they do not need to provide superannuation support.

Under paragraph 27(1)(d) of the SGAA 'prescribed employees' are exempt being those who are working temporarily in Australia and holding certain visas referred to in the Superannuation Guarantee (Administration) Regulations 1993 (SGAR). Under Regulation 7(1) of the SGAR exempt employees are:

· employees holding an executive (overseas) visa or entry permit (code number 413) under the Migration Regulations in force from 19 December 1989 to 31 January 1993 (inclusive);

· employees holding a Class 413 (executive (overseas)) visa or entry permit under the Migration (1993) Regulations;

· national managing executives or deputy national managing executives who are the holders of a Subclass 456 (Business (Short Stay)) visas or a Subclass 956 (Electronic Travel Authority) (Business Entrant - Long Validity) visa, or Subclass 977 (Electronic Travel Authority) (Business Entrant - Short Validity) visas;

· full-time employees who hold one of the above visas and meets certain executive criteria, and

· certain senior executive employees who hold Subclass 457 (Business (Long Stay)) visas.

Under paragraph 27(1)(e) of the SGAA, employers are exempted from having to provide superannuation guarantee (SG) contributions for employees from countries which have Bilateral Agreements with Australia.

A Bilateral Agreement is a scheduled international social security agreement. It prevents an employee from being covered for employer superannuation support under the legislation of Australia and the other country if that is required. The effect of the Bilateral Agreement is that only the home country's superannuation scheme applies.

Regulation 7AC of the SGAR provides that if there is a Bilateral Agreement the employer in Australia is not subject to the superannuation guarantee legislation in respect of the work for which the payment is made.

The foreign country of which your client is a citizen is not one of the countries that has a Bilateral Agreement with Australia, therefore, your client's Australian employer is not exempt from providing SG contributions under paragraph 27(1)(e) of the SGAA.

SG contributions are required to be made to a complying superannuation scheme (section 22 of the SGAA) or a complying superannuation fund (section 23 of the SGAA).

Under section 295-185 of the ITAA 1997, contributions made on behalf of a temporary resident of Australia at the end of the income year to which the contribution relates, are not included in the assessable income of a complying superannuation fund (section 295-160 of the ITAA 1997).

Issue 2

Subject

Foreign investment funds and temporary resident

Question

Is the growth in your client's foreign pension fund (foreign Fund) subject to tax in Australia if the benefits are retained in the foreign country and your client is a temporary resident?

Answer:

No

This ruling applies for the following period

1 July 2010 to 30 June 2011

The scheme commenced on

1 July 2010

Reasons for decision

Summary

Ordinary income derived from a foreign source, excluding employment related income and capital gains on shares and rights acquired under employee share schemes; is exempt from income tax in Australia when derived by a temporary resident of Australia.

The foreign investment fund (FIF) provisions are not applicable from 1 July 2010.

Detailed Reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

However, the foreign source income exemption for temporary residents, contained in Subdivision 768-R of the ITAA 1997, provides an exemption for most foreign income derived by temporary residents of Australia.

A temporary resident is defined in section 995-1 of the ITAA 1997 as a person:

1. who holds a temporary visa granted under the Migration Act 1958; and

2. who is not an Australian resident within the meaning of the Social Security Act 1991.

3. whose spouse is not an Australian resident within the meaning of the Social Security Act 1991.

In particular, section 768-910 of the ITAA 1997 provides that ordinary income derived from a foreign source, excluding employment related income and capital gains on shares and rights acquired under employee share schemes; is exempt from income tax in Australia when derived by a temporary resident of Australia.

Assessability of the growth in the foreign pension fund for the 2010-11 and subsequent income years

The foreign investment fund (FIF) rules have been repealed by the Tax Laws Amendment (Foreign Source Income Deferral) Bill (No1) 2010 which received royal assent as Act No 114 of 2010. This Act repeals the FIF rules and the deemed present entitlement rules in relation to the 2010-11 and later income years.

Therefore from 1 July 2010 Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trusts no longer need to include income on an attribution basis under the FIF rules.

In your client's case, if your client has an interest in FIFs, regardless of whether your client retained the funds in the foreign country or transfers them to Australia, as a temporary resident or a permanent resident of Australia, the FIF provisions are not applicable from 1 July 2010.