Edited version of private ruling

Authorisation Number: 1011911615567

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Ruling

Subject: Foreign lump sum payment

Issue

Question 1

Is any part of the lump sum payment transferred from a foreign superannuation fund to an Australian superannuation fund assessable as 'applicable fund earnings' under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the capital distribution withdrawal from a Fund in an overseas country assessable to you?

Answer

No.

Question 3

Is the accumulated foreign source income of the Fund in an overseas country that is not capital distribution and was not previously taxed in Australia assessable to you?

Answer

Yes.

This ruling applies for the following period:

2009-10 income year

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are under 60 years of age.

You were an Australian resident for taxation purposes during the 2006-07 income year.

You became an Australian citizen during the 2008-09 income year.

You ceased to be a citizen of an overseas country during the 2009-10 income year.

You are a member of a Fund in an overseas country (the Fund) which is established overseas.

You contributed to the Fund from several years ago.

Restrictions are placed on withdrawing monies from the fund before retirement age but there are exceptions. For example, on leaving the country overseas citizens who renounce their citizenship can withdraw all their savings from the fund.

The fund is divided into three accounts as follows:

a. Ordinary account - this account is for you to purchase a home, pay for insurance, investment and education.

b. Special account - this account is for retirement and cannot be fully withdrawn before you reach the age of 55, become incapacitated, leave the country or on death. Furthermore, this account also allows members to use the monies to service monthly home loan repayments under the following conditions:

· Your property is purchased before a specific date during the 2003-04 income year;

· You are eligible to use your Fund savings to pay your monthly housing payments;

· Your Ordinary Account contribution is insufficient to meet the monthly housing payments; and

c. The balance in your Ordinary Account has been depleted.

Medisave account - this account is for hospitalisation expenses and approved medical insurance.

You received a lump sum from the Fund during the 2009-10 income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99B
Income Tax Assessment Act 1936 Subsection 99B (1)
Income Tax Assessment Act 1936 Subsection 99B (2)
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 6-10(4)
Income Tax Assessment Act 1997 Subsection 6-10(2)
Income Tax Assessment Act 1997 Subsection 295-95(2)
Income Tax Assessment Act 1997 Section 305-70
Income Tax Assessment Act 1997 Subsection 305-70(2)
Income Tax Assessment Act 1997 Section 305-75
Income Tax Assessment Act 1997 Subsection 305-75(2)
Income Tax Assessment Act 1997 Subsection 305-75(3)
Income Tax Assessment Act 1997 Paragraph 305-75(3)(a)
Income Tax Assessment Act 1997 Paragraph 305-75(3)(b)
Income Tax Assessment Act 1997 Paragraph 305-75(3)(c)
Income Tax Assessment Act 1997 Paragraph 305-75(3)(d)
Income Tax Assessment Act 1997 Subsection 960-50(1)
Income Tax Assessment Act 1997 Subsection 960-50(6)
Income Tax Assessment Act 1997 Subsection 995-1(1)
Taxation administration Act 1953 Subsection 357-110

Reasons for decision

Summary of decision

There are no applicable fund earnings as the accounts within your superannuation fund have been determined to be not superannuation accounts. Hence, section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) has no application.

The capital distribution withdrawal from the Fund in an overseas country is not assessable.

The accumulated foreign source income of the Fund in an overseas country that is not capital distribution and was not previously taxed in Australia is assessable.

Detailed reasoning

Lump sum payments from foreign superannuation funds

From 1 July 2007, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received or transferred more than six months after a person has become an Australian resident will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The applicable fund earnings are subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

Before determining whether an amount is assessable under subsection 305-70(2) 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 305-70(2) of the ITAA 1997 will not have any application.

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 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.

Members of a Fund (the Fund) can withdraw all their savings on leaving the overseas country permanently.

A member's entitlements in the fund are split into different accounts.

The question at issue is whether or not the fund established in an overseas country is a superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997. If the fund is not a superannuation fund then subsection 295-95(2) of the ITAA 1997 will have no application.

Under section 10 of the SIS Act, the term superannuation fund is defined as :

A fund that is an indefinite continuing fund; and is a provident, benefit, superannuation or retirement fund, or a public sector superannuation scheme.

There is no definition of the phrase provident, benefit, superannuation or retirement fund in either the ITAA 1997 or the SIS Act. However, the phrase 'provident, benefit and superannuation fund established for the benefit of employees' was considered by Justice Kitto of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232;(1967) 14 ATD 519 (Mahony).

Justice Kitto referred to each of the three terms separately and said:

Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words provident, benefit and superannuation must be taken to have connotated a purpose narrower than the purpose of conferring benefits in a completely general sense, upon employees all that need to be recognised is that just as provident and superannuation both referred to the provision of a particular of benefit so benefit must have meant a benefit, not in the general sense, but characterised by some specific future purpose.

Justice Kitto in Mahony referred to superannuation as the making of provision for financial support for an employee, or for the employee's estate or dependants, to arise on the employee's retirement, death or other cessation of employment (for example, termination or resignation).

Furthermore, the view that a superannuation fund needs to be for exclusive purposes is highlighted in Justice Kitto's judgement that the fund did not satisfy any of the three provisions, that is, provident, benefit, or superannuation fund, as there existed provisions for retirement purposes, it could not be accepted as a superannuation fund in that it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

The view that a superannuation fund should be established for the sole purposes of providing superannuation benefits on retirement is also supported in the High Court decision Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v Federal Commissioner of Taxation (No 2) (1966) 10 AITR 290; (1966) 14 ATD 333; 40 ALJR 265 (Scott). Justice Windeyer said:

… 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 reaching a prescribed age.

The Commissioner of Taxation's view is that a fund, to be classified as a superannuation fund, 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 or death of the individual or as specified under the SIS legislation.

In section 62 of the SIS Act, a regulated superannuation fund must be maintained solely for the core purposes of providing benefits to a member when the following 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).

Provided a regulated superannuation fund is maintained for one or more of the core purposes, section 62 of the SIS Act also allows a superannuation fund to provide benefits for ancillary purposes. Ancillary purposes cover benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age. As indicated, ancillary purposes do not relate to general or non-retirement purposes such as education, home purchases, medical expenses et cetera.

It is noted that the fund does not qualify as a regulated superannuation fund, as it was established and operated out of Australia, and the SIS legislation applies only to regulated superannuation funds, as defined in section 19 of the SIS Act. Nevertheless, the Commissioner views the SIS legislation as providing guidance as to what benefit or specific future purpose a superannuation fund should provide.

As indicated in the facts, entitlements in the "Special account" are intended to provide for the member's retirement and cannot be withdrawn before retirement at age 55, or on invalidity or death. In this regard it is very similar to the purposes outlined in section 62 of the SIS Act. However, it was also stated in the facts that members are able to use monies in the account to service monthly home loan repayments.

You also had entitlements in two other accounts of the fund - "Ordinary account" and "Medisave account". A member's entitlement in these accounts can be withdrawn for purposes other than for retirement. These purposes include purchasing a first home, education expenses and medical expenses.

Despite that some of the entitlements in the "Special account" have been set aside for retirement purposes, based on a overall assessment of all 3 accounts that make up the Fund, it is not accepted that the Fund falls within the definition of a foreign superannuation fund under subsection 995-1(1) of the ITAA 1997 as members are able to use the monies in the fund for purposes other than retirement purposes.

Therefore section 305-70 of the ITAA 1997 has no application and there can be no applicable fund earnings.

Assessability of withdrawal from the Fund

The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)).

The Fund is a foreign retirement fund that is similar to a trust as there is a trustee or custodian who holds the trust assets and investments and is obligated to deal with the trust property for the benefit of its beneficiary's members.

Your withdrawal from your Fund account is not ordinary income (subsection 6-5(2) of the ITAA 1997).

'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). 

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with receipt of trust income not previously subject to tax.

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

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) of the ITAA 1936 and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents either:

a corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer; or

b amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer;

c amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936; or

d and amounts included in assessable income under section 102AAZD of the ITAA 1936 (that is, amount included under the transferral trust measures for taxpayer having transferred property or services).

The Fund is a trust set up in an overseas country, therefore is not an Australian trust or a resident Part IX entity (subsection 481(1) of the ITAA 1936).

Since you as an Australian resident are entitled to the distribution/withdrawal from a foreign trust, the amounts withdrawn from the fund would be assessable to you under subsection 99B(1) of the ITAA 1936.

However, the amount assessable under subsection 99B(1) of the ITAA 1936 does not include any amount listed under subsection 99B(2) of the ITAA 1936.

A capital distribution to the extent that it forms part of the corpus of the trust would come within paragraph 99B(2)(a) of the ITAA 1936. Distributions to the extent that come within subsection 99B(2) of the ITAA 1936 would also be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936.

Generally only income accumulated in the fund paid to you as a resident taxpayer that represents trust income of a class which is taxable in Australia and had not previously been subject to tax in Australia would be assessable to you under subsection 99B(1) of the ITAA 1936. Amounts assessable under subsection 99B(1) of the ITAA 1936 will form part of your assessable income under subsection 6-10(4) of the ITAA 1997.