Edited version of your private ruling

Authorisation Number: 1012449905951

Ruling

Subject: Withdrawal of lump sum from foreign investment fund

Questions and answers

Is any part of the lump sum payment from the Guaranteed Interest Contract account in the Registered Retirement Savings Plan (the GIC RRSP) assessable as applicable fund earnings under subsection 305-70(2) of the Income Tax Assessment Act 1997?

No.

Is any part of the lump sum payment from the GIC RRSP assessable as a distribution from a foreign trust?

No.

Is any part of the payment assessable as ordinary income under section 6-10(4) of the ITAA 1997?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You became a resident of Australia for tax purposes a number of years ago.

You held a Guaranteed Interest Contract (GIC) which forms part of an overseas registered retirement savings plan (GIC RRSP).

You have made withdrawals from the fund.

You confirmed that the particular GIC RRSP is not a 'locked in' RRSP as it permits early release of benefits for housing (a non-retirement purpose).

You also confirmed that the balance of funds in the particular GIC RRSP can be withdrawn and will be subject to non-resident withholding tax (15%) overseas.

No contributions were made to the GIC RRSP after you became a resident of Australia for tax purposes.

No payments from any other foreign superannuation funds were transferred to the particular GIC RRSP after you became a resident of Australia for tax purposes.

Relevant legislative provisions

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 Subsection 295-95(2)

Income Tax Assessment Act 1997 Subsection 305-60

Income Tax Assessment Act 1997 Subsection 305-70

Income Tax Assessment Act 1997 Subsection 305-70(1)

Income Tax Assessment Act 1997 Subsection 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 Subsection 305-75 (5)

Income Tax Assessment ACT 1997 Subsection 305-75 (6)

Income Tax Assessment ACT 1997 Subsection 306-70

Income Tax Assessment ACT 1997 995-1(1)

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 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 770-15(1)

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section19

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Lump sum payments from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received more than six months after a person has become an Australian resident will be assessable under subsection 305-70(2) 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 lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is the amount worked under either subsection

305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) 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 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) 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:

(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 Australian 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) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund;

or

(a) 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 be exclusively 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 when the events occur:

(i) on or after retirement from gainful employment; or

(ii) attaining a prescribed age; and

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

Though section 62 of the SIS Act also allows a superannuation fund to provide benefits for 'ancillary purposes', such as, 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, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses et cetera.

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 its 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, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund:

(i) can also be used as a savings plan for non-retirement purposes; and/or

(ii) contains provisions for pre-retirement withdrawals for general non-retirement purposes such as housing, education and medical expenses et cetera.

In your case, in order for the particular RRSP to be considered a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 it must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection.

In order to satisfy section 10 of the SIS Act, the RRSP must be a provident, benefit, superannuation or retirement fund.

Looking at the RRSP it is evident they are established outside of Australia and the central management and control is outside of Australia.

From the information provided, we understand that the RRSP permits early withdrawals for non-retirement purposes such as for housing.

You also advised that the balance of funds can be withdrawn at any time and will be subject to non-resident withholding tax (15%) in the overseas country.

In other words the RRSP provides for the payment of benefits for non-retirement purposes and is not solely (that is, exclusively) for retirement purposes.

Although some of the requirements as discussed previously are met (such as being established outside of Australian and central management and control is also outside of Australia), the requirement that the RRSP be a provident, benefit, superannuation or retirement fund is not met.

Accordingly, the Commissioner considers the RRSP is not a foreign superannuation fund as the RRSP is not solely (that is, exclusively) for retirement purposes.

Therefore, the RRSP is not a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. Consequently, section 305-70 of the ITAA 1997 would not apply to any lump sum payment made from the RRSP.

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)).

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 overseas , therefore it 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 Fund 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 amounts listed under subsection 99B(2) of the ITAA 1936.

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 they come within subsection 99B(2) of the ITAA 1936, would be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936.

Only the income accumulated in the Fund paid to you as a resident taxpayer that is normally taxable in Australia and had not been previously subject 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 dollar 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.

General advice

Foreign income tax offset (FITO)

Subsection 770-10(1) of the ITAA 1997 provides that 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.

Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains (subsection 770-15(1) of the ITAA 1997). 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, a taxpayer is required to gross up their 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.

A taxpayer does not need to calculate the foreign tax offset cap if they elect to use the $1000 'de minimise cap'. If a taxpayer elects this, they cannot claim more than $1000 of the foreign income tax paid.

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"