Edited version of your private ruling

Authorisation Number: 1012533457259

Ruling

Subject: Lump sum payment from overseas

Question 1

Does section 305-70 of the Income Tax Assessment Act 1997 apply to a lump sum payment received from a retirement-savings account in a foreign country?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2013

Relevant facts and circumstances

Your client (the Taxpayer) participated in a retirement-savings scheme (the Scheme) in a foreign country.

The Taxpayer became an Australia resident in early 20XX. The Taxpayer had a specified amount of retirement savings in the Scheme vested in them at that time.

Since residing in Australia the Taxpayer made a specified amount of contributions to the Scheme. The contributions made by the Taxpayer were made from their pre-tax wages. The Taxpayer was taxed in that foreign country on the investment returns generated by the contributions.

As the Taxpayer was receiving payment from their employer in that foreign country in respect of their balance of leave till early 20YY, the Taxpayer was considered to have been still in that employment after they arrived in Australia up to that time.

On the basis of their permanent emigration to Australia, the Taxpayer received from the Scheme in early 20YY a specified lump sum that represented their retirement savings in the Scheme. This amount was net of contributions previously paid to the Scheme by the government of that foreign country that were required to be re-paid to that government when benefit was cashed on grounds of permanent emigration.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Subsection 305-75(1)

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

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

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Summary

The Scheme is not a 'superannuation fund' as is understood in Australia. The lump sum payment received by the Taxpayer from the Scheme is, therefore, not a superannuation lump sum. Consequently, section 305-70 of the ITAA 1997 does not apply to that lump sum payment, and no calculation of applicable fund earnings is, therefore, necessary.

Detailed reasoning

In your application for a private ruling you asked the Commissioner for advice on how the amount of contributions re-paid to the foreign government concerned is to be dealt with under subsection 305-75(3) of the ITAA 1997 for the purposes of determining the amount of 'applicable fund earnings' in relation to a lump sum payment your client received from the Scheme.

What needs to be determined first is whether the Scheme is a 'superannuation fund' as it is generally understood here in Australia. If the Scheme is not a superannuation fund, then section 305-70 of the ITAA 1997 will not apply to the lump sum payment. Some other appropriate provisions of the ITAA 1997 or the Income Tax Assessment Act 1936 may apply instead.

Lump sum payments made from a foreign superannuation fund

Any 'applicable fund earnings' in relation to a superannuation lump sum payment from a 'foreign superannuation fund that is received by a person more than six months after the person has become an Australian resident will be assessable under section 305-70 of the ITAA 1997. The remainder of the lump sum payment is not assessable income and is not exempt income of the person.

'Applicable fund earnings' are the amount worked out under subsection 305-75(2) or (3) of the ITAA 1997, depending on the residency of the taxpayer during the period to which the lump sum relates. In your client's case, subsection 305-75(3) applies as they became an Australian resident after the start of the period to which the lump sum they received from the Scheme relates.

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 funds 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 Australia would prima facie be a 'foreign superannuation fund'. The fact that some of its members may be Australian residents would not necessarily alter this.

Superannuation fund

The term 'superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the same 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 follows:

(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 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 (Scott); (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 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.

Under section 62 of the SIS Act, a regulated superannuation fund must be maintained solely for:

a) one or more of the following purposes (the core purposes):

(i) the provision of benefits for each member of the fund on or after the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged…

…

(iv) the provision of benefits in respect of each member of the fund on or after the member's death…

…

b) for one or more of the core purposes and for one or more of the following purposes (the ancillary purposes):

(i) the provision of benefits for each member of the fund on or after the termination of the member's employment with an employer who had, or any of whose associates had, at any time, contributed to the fund in relation to the member;

(ii) the provision of benefits for each member of the fund on or after the member's cessation of work, if the work was for gain or reward in any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged and the cessation is on account of ill-health (whether physical or mental);

Notwithstanding that the SIS Act applies only to regulated superannuation funds, as defined in section 19 of the SIS Act, and that 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.

Furthermore, 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 facilitating a member to buy a home, start a business or migrate to another country.

Taking into account the legislation and the decisions made in Scott and Mahony, the Commissioner is of the 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.

According to information available to the Commissioner, a member of the Scheme may, after a specified number of years of membership, use their savings (except that part originating from government contributions) to buy their first home.

As a member of the Scheme may use their savings to buy their first home, the Commissioner is of the view that the Scheme is not a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997. Consequently, the lump sum payment your client received from the Scheme is not a superannuation lump sum, and sections 305-70 and 305-75 of the ITAA 1997 do not apply to tax any 'applicable fund earnings' it may include.