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Ruling

Subject: Lump sum payment from an overseas fund

Issue 1

Question 1

Is any part of the lump sum payment received by the taxpayer from an overseas plan assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Issue 2

Question 1

Is any part of the lump sum payments received by you from an overseas plan assessable as a trust distribution under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

Yes.

Question 2

Are you entitled to a foreign income tax offset for the foreign income tax paid proportionate to the amount included in your assessable income?

Answer 2

Yes.

This ruling applies for the following period

For the year ended 30 June 2011

This scheme commenced on

1 July 2010

Relevant facts and circumstances

You resided and worked in an overseas country.

Over 10 years ago, you purchased a deferred life annuity from a life insurance company and made contributions to a Plan (the Plan), to provide you with retirement benefits. The Plan is not an employer sponsored plan.

The Plan allows for partial withdrawals and the termination of coverage under the contract on or before the annuitant's retirement date.

Over five years ago, you permanently relocated to Australia from the overseas country and became an Australian resident for tax purposes.

No contributions have been made by you or anyone on behalf of yourself since you became a resident of Australia.

You provided the value of your benefits in the Plan at a number of dates.

During the 2010-11 income year, you made a withdrawal from your benefits in the Plan.

In the notice from the Plan it shows the value of your benefits as at the withdrawal date.

The coverage under the contract of the Plan can be cancelled if no contributions are made within a specified period, or if after a specified number of years the annuity account value is less than $500.

You are over the age of 65 years.

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 1936 Subsection 481(1).

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Subsection 6-10(2).

Income Tax Assessment Act 1997 Subsection 6-10(4).

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Subsection 295-95(2).

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Subsection 305-75(2).

Income Tax Assessment Act 1997 Subsection 305-75(3).

Income Tax Assessment Act 1997 Subsection 770-10(1)

Income Tax Assessment Act 1997 Subsection 770-15(1)

Income Tax Assessment Act 1997 Section 960-50.

Income Tax Assessment Act 1997 Subsection 995-1(1).

Superannuation Industry (Supervision) Act 1993 Section 10.

Superannuation Industry (Supervision) Act 1993 Section 19.

Superannuation Industry (Supervision) Act 1993 Section 62.

Income Tax Assessment Regulations 1997 Regulations 960-50.01.

Reasons for decision

Issue 1

Question 1

Summary

The Plan is not considered to be a foreign superannuation fund as the Plan provides for the payment of benefits for other reasons and not solely (that is, exclusively) for retirement purposes.

The Plan permits withdrawals (subject to prescribed limits) and allows coverage under the contract to be terminated before the retirement date.

Therefore the payment transferred from the Plan is not assessable as applicable fund earnings.

The withdrawal amount made from the Plan less your contributions (the net withdrawal amount) and any amount previously included in your income is assessable as a trust distribution.

You are entitled to a Foreign Income Tax Offset for the foreign tax paid on a proportionate basis for the share of foreign income included in your assessable income.

Detailed reasoning

Lump sum payments from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment (LSP) from a foreign superannuation fund that is transferred or received 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 is subject to tax at the person's marginal rate. The remainder of the LSP 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 subsection 305-75(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) 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 section 305-70 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 section 305-70 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 an 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:

· the total market value of the fund's assets attributable to superannuation interests held by active members; or

· 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.

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is:

· a fund that:

· is an indefinitely continuing fund; and

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

· a public sector superannuation scheme;

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v. Commissioner of Taxation of the Commonwealth (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. Commissioner of Taxation (Cth) (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 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 SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member:

· on or after retirement from gainful employment; or

· on 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 SIS Act applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and the SIS Regulations) 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 SIS Act.

Therefore, in order for the lump sum payment to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, the paying fund must be a provident, benefit, superannuation or retirement fund established and administered overseas.

In this case the Plan possess some retirement related provisions and penalties generally apply to deter pre-retirement withdrawals. However, it is also noted that:

(i) pre-retirement withdrawals can be made from the Plan, and

(ii) the coverage under the contract can be terminated before the retirement date.

The Plan must also, as noted earlier, it must be a provident, benefit, superannuation or retirement fund. In addition, benefits can only be withdrawn on retirement.

Although some of the requirements are met (such as being established outside of Australia and central management and control being outside of Australia), the requirement that the Plan be a provident, benefit, superannuation or retirement fund has not been met. The reason for this is that, apart from permitting withdrawals (subject to prescribed limits) the Plan permits the coverage under the contract to be terminated before the retirement date.

In other words a Plan provides for the payment of benefits for other reasons and not solely (that is, exclusively) for retirement purposes.

Therefore, the Plan is not a foreign superannuation fund for the purposes of the ITAA 1997. Consequently, section 305-70 of the ITAA 1997 would not apply to any lump sum payment made from the Plan.

Question 2

Assessable income

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 ITAA 1997).

Your withdrawal from the Plan 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 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) 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 (for example, amounts contributed to 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;

b) amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer (for example, amounts that are not normally assessable);

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; 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).

In your case, the withdrawals made from your Plan less your contributions and any amount previously included in your income are assessable to you under subsection 99B(1) of the ITAA 1936.

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

Since you are an Australian resident, who had made withdrawals from a foreign trust, the amounts withdrawn from the Plan are similar to distributions from a trust and would be assessable under subsection 99B(1) of the ITAA 1936.

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

A withdrawal of an amount that represents amounts deposited by you, would come within paragraph 99B(2)(a) of the ITAA 1936.

Distributions, to the extent that comes within subsection 99B(2) of the ITAA 1936, would be excluded from amounts assessable under subsection 99B(1).

Only the income accumulated in the Plan paid to you as a resident taxpayer that is normally taxable in Australia and had not been previously subjected to tax in Australia would be assessable to you under subsection 99B(1) of the ITAA 1936.

In this case, it is the gross amount withdrawn converted to Australian dollars (see below, note - conversion to Australian dollars) less the amount that represents your deposits converted to Australian dollars is the amount assessable under subsection 99B(1) of the ITAA 1936.

Amounts assessable under subsection 99B(1) of the ITAA 1936 form part of your assessable income under subsection 6-10(4) of the ITAA 1997.

Any withdrawal charge made on the amount withdrawn to the extent of amount assessable to you would be deductible under section 8-1 of the ITAA 1997. The total withdrawal charges should be apportioned between the non-assessable capital component and the assessable income component on a proportionate basis.

Question 3

Entitlement to Foreign Income Tax offset

Subsection 770-10(1) of the ITAA 1997 provides that Foreign Income Tax Offset (FITO) can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for the income year, only a proportionate share of the foreign income tax paid (the share that corresponds to the part that is assessable income) will count towards the tax offset.

The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

However, section 770-140 of the ITAA 1997 will deem you not to have paid foreign income tax to the extent that you or any other associated entity become entitled to a refund of the foreign income tax.

When claiming a FITO, you are required to gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income.

The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997).

The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source.

You do not need to calculate the foreign tax offset cap if you elect to use the $1000 'de minimise cap'. If you elect this, you cannot claim more than $1000 of the foreign income tax paid.

In this case, foreign tax was withheld from your gross payment under the law of the foreign country. Therefore, you are entitled to FITO under section 770-10 of the ITAA 1997 for the tax paid on a proportionate basis for the share of foreign income included in your assessable income. You will need to apportion your foreign tax paid over the assessable and non-assessable component of the lump sum withdrawn on which the foreign tax was imposed. Once you calculated the amount of foreign tax paid in proportion to the foreign income included in your assessable income, you can decide whether you will elect to use either the FITO cap or the 'de minimise cap'.

More information on the calculation of the FITO cap and entitlements are available on the Tax office website www.ato.gov.au at the link to "Guide to foreign income tax offset rules 2010-11".

Note - Conversion to Australian dollars

Section 960-50 of the ITAA 1997 applies to a transaction, event or things that involve an amount in a foreign currency. Subsection 950-50(1) provides that an amount in foreign currency is to be translated into Australian currency.

Item 11 of the table in section 960-50(6) of the ITAA 1997 is appropriate to apply in translating the foreign currency where no other item in the table applies and there is a calculation involves in determining the assessable or deductible amount. That is, for example, the amount to be included, if any, under subsection 99B(1) of the ITAA 1936 is the amount remaining after excluding or deducting amounts listed under subsection 99B(2) of the ITAA 1936.

The amounts of each receipt and payment should be translated into Australian currency at the exchange rate applicable at the time of the receipt or payment.

Foreign exchange rates are available at the Tax office website www.ato.gov.au. You can type in foreign exchange rates in the search box on the home page.