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Ruling

Subject: Lump sum payments from a foreign superannuation fund

Question 1

Is any part of the payment received from the Overseas Fund assessable as applicable fund earnings?

Answer

No.

Question 2

If the payment is not assessable as applicable fund earnings, will any part of the lump sum death benefit be assessable as a distribution from a trust?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2012

The scheme commenced on:

During income year ended 30 June 2012

Relevant facts and circumstances

The Overseas Fund was established to provide financial security for its members when they retire.

The Overseas Fund covers all employees who are citizens of the foreign country in which it was established.

The Overseas Fund provides a number of pre-retirement benefits to members such as housing assistance, medical assistance and education assistance. The Overseas Fund advises its members that withdrawing savings for these pre-retirement benefits may affect their quality of life when they retire.

Your deceased husband made monthly contributions to the Overseas Fund from his after tax salary.

As a consequence of your deceased husband's death, you received a lump sum death benefit from the Overseas Fund in the 2011-12 income year.

Relevant legislative provisions

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 995-1

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

Superannuation Industry Supervision Act 1993 Section 10

Superannuation Industry Supervision Act 1993 Subsection 10(1)

Superannuation Industry Supervision Act 1993 Section 62

Reasons for decision

An amount received from a foreign superannuation fund is assessable as applicable fund earnings in accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997).

However, if the foreign fund is not a superannuation fund, section 305-70 of the ITAA will not apply.

Meaning of 'superannuation fund'

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

Subsection 10(1) of the SIS Act defines 'superannuation fund' as:

(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 meaning of 'provident, benefit, superannuation or retirement fund' is not defined in the SIS Act therefore, its meaning must be determined according to the ordinary meaning of the words having regard to the context in which they appear.

The meaning of the terms 'superannuation fund' and 'fund' was examined by the High Court in Scott v. Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333. 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 there from being capitalised. I do not put this forward as a definition, but rather as a general description.

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 Kitto J said:

… each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognised is that just as 'provident' and 'superannuation' both refer to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other a provision, to arise on an employee's retirement or death, or other cessation of employment, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit not in a general sense, but characterised by some specific future purpose. A funeral benefit is a familiar example.

In addition, section 62 of the SIS Act, provides that a regulated superannuation fund must be 'maintained solely' for one or more 'core purposes' or one or more of the core purposes and for one or more of the 'ancillary purposes' including provision of benefits:

· on or after retirement from gainful employment; or

· attaining a prescribed age; and

· on the member's death to a member's dependants or legal representative.

In view of the above, the Commissioner of Taxation (the Commissioner) considers 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, incapacity or death of the individual or as specified under the SIS Act.

While a fund may contain some terms for the provision of benefits upon retirement, incapacity or death, the Commissioner considers that such a fund is not a superannuation fund if:

· it can also be used as a savings plan for non-retirement purposes; and/or

· the terms of the fund provide for pre-retirement withdrawals for general non-retirement purposes such as housing, education, medical expenses.

In this case, as well as providing benefits on retirement and in case of permanent incapacity or death, the Overseas Fund also provides a number of pre-retirement benefits to member such as home ownership, healthcare and education. Therefore, the Overseas Fund is not a superannuation fund.

Consequently, no part of the payment will be assessable as applicable fund earnings.

Assessable income

The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia (sections 6-5 and 6-10 of the ITAA 1997).

Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997).

Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

In this case, you have not earned the lump sum death benefit payment as it does not relate to services performed. The payment is a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the investment in the Overseas Fund and was only payable in certain circumstances. Thus, the lump sum death benefit payment is not considered to be ordinary income and is, therefore, not assessable under section 6-5 of the ITAA 1997.

Statutory income

Statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law (section 6-10 of the ITAA 1997).

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income.

A lump sum payment from a foreign superannuation fund may be assessable, in whole or in part, as statutory income under section 305-70 of the ITAA 1997.

As discussed above, the Overseas Fund is not considered to be a superannuation fund for the purposes of the ITAA 1997, therefore section 305-70 of the ITAA 1997 will not have any application to the payment from the Overseas Fund.

Because the Overseas Fund is not considered to be a superannuation fund, the lump sum death benefit payment would be assessable as a trust distribution. However, the payment would consist of indiscernible capital (return on your late spouse's contributions) and income components.

Taxation Determination TD 93/58 states that where a person receives a lump sum payment and that payment cannot be dissected into income and capital components, the full amount is considered to be a capital amount. Therefore, the lump sum death benefit received from the Overseas Fund will be treated as a capital payment. As such, even though it is a distribution from a trust, it does not form part of your assessable income.

There is no other provision in the Australian taxation provisions that apply to your lump sum death benefit payment. Therefore the payment is not regarded as assessable income.