Edited version of your private ruling

Authorisation Number: 1012502222600

Ruling

Subject: Foreign Superannuation Fund

Question 1

Is the foreign entity which was established in an overseas country a 'superannuation fund' for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997) and hence, a 'foreign superannuation fund'?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Your client was an Australian resident for tax purposes for the year ended 30 June 20XX.

During the year ended 30 June 20XX, your client held a controlling interest in "the foreign entity" which is a structure set up in an overseas country.

You stated that the foreign entity was originally established by your client for the purpose of rolling over a redundancy payment upon termination of an employment contract in the overseas country.

You stated that the foreign entity is an overseas structure set up for your client prior to their residence in Australia to receive their severance payment.

The law in the overseas country requires that the foreign entity be appropriately managed to achieve a certain return in order to fund the required periodic payments payable to your client at a future point in time.

Once the money is in the foreign entity there is no further access to the severance money. This is in order to preserve the future obligation to pay the periodic payments.

Breaching these strict rules could invalidate the foreign entity's tax concession in which case the tax authorities in the overseas country could require the full tax at the highest rate to be paid immediately on the initial lump sum payment and any growth that has occurred.

Under the foreign entity's rules, the period payments have to start at the age of 65 at the latest. Once started, the periodic payments must span a term that is equal or larger than the period of 1% mortality risk for that person. In effect, this means that the younger the age at which you start receiving your periodic payments, the longer the term over which these payments are required to be paid.

The level and frequency of the payments are formalised at the moment that periodic payments are requested. This is details in a formal act of periodic payments. Once started, the periodic payments can vary in amount but with no more than a factor of 5. Changes can be made before turning 65. After 65 the periodic payment schedule is fixed.

Your client was under the age of 65 during the year ended 30 June 20XX.

The periodic payments are income and are taxed at the progressive tax rate.

The benefits may only be granted to your client and, following their death, to your client's spouse/partner and to their children, as long as the children are younger than the age of 30.

The foreign entity is a limited company in the overseas country in which it was established.

The foreign entity only generates a profit if it has achieved a higher return than that required to meet its future obligation and only pays corporation tax if it makes a profit.

The foreign entity can only distribute dividends if it has made a profit. The payment of dividends is not advisable during the accumulation years and typically is only done after receiving approval from the tax authorities in the overseas country.

Relevant legislative provisions

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

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

Reasons for decision

Summary

The foreign entity which was established in an overseas country is not a 'superannuation fund' for the purposes of the ITAA 1997 and accordingly, it is not a foreign superannuation fund.

Detailed reasoning

Subsection 995-1(1) of the ITAA 1997 provides that at a particular time, a 'foreign superannuation fund' is a superannuation fund that is not an 'Australian superannuation fund' at that time, where:

(a) 'superannuation fund'  has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act); and

(b) 'Australian superannuation fund' has the meaning given by section 295-95 of the ITAA 1997.

Superannuation fund

'Superannuation fund' in subsection 10(1) of the SIS Act means:

(a) a fund that is:

(i) an indefinitely continuing fund; and

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

(b) a public sector superannuation scheme.

This suggests that in order for the foreign entity to be considered a 'superannuation fund', it must be an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund or it must be a public sector superannuation scheme.

In this case, as the foreign entity is not a public sector superannuation scheme, therefore, it must satisfy paragraph 10(1)(a)(i) of the SIS Act in order to be classified as a 'superannuation fund'.

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 when the 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).

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.

In this case, the facts provided show that the foreign entity is a limited company in the overseas country in which it was established and not a superannuation fund as it is able to make dividend payments when a profit is made. Furthermore, the company was not established for the core purpose of providing benefits to a member when they retire from gainful employment or attaining a prescribed age or on the member's death. Therefore, the foreign entity is not a provident, benefit, superannuation or retirement fund.

Accordingly, the foreign entity is not a superannuation fund under subsection 10(1) of the SIS Act. 

Subsection 295-95(2) of the ITAA 1997 provides that:

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.

In this case, your client holds an interest in the foreign entity which is not a superannuation fund under subsection 10(1) of the SIS Act as it is not a provident, benefit, superannuation or retirement fund and nor is it a public sector superannuation fund. Furthermore, the fact that it is a limited company in an overseas country whose assets are owned by shareholders suggests that and the foreign entity is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Based on the information provided, the Commissioner considers that the foreign entity does not satisfy the definition of a foreign superannuation fund under subsection 995-1(1).