Edited version of your private ruling

Authorisation Number: 1012579154020

Ruling

Subject: Lump sum payment and income from foreign fund

Question 1

Is any part of the amount transferred from the foreign fund of your client's deceased spouse, to the foreign fund of your client, included in your client's assessable income for the 2011-12 financial year?

Answer

No.

Question 2

Is any part of the payment of $X from a foreign fund included in your client's assessable income for the 2011-12 financial year?

Answer

No.

Question 3

When an income stream commences to be payable from your client's foreign fund, will the income stream be assessable as foreign income?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client was over 60 years old in the 2012 financial year.

Your client became a resident of Australia for income tax purposes more than 20 years ago.

Your client has an interest in a foreign fund (Fund A).

Your client's spouse became a resident of Australia for income tax purposes more than 20 years ago.

Your client's spouse, was a member of a foreign fund (Fund B) from which they received an income stream. This income was included each year in their income tax return as foreign income.

Your client's spouse died in late 2011.

In late 2011, an amount was transferred from Fund B to a newly created foreign fund (Fund C) for your client.

In late 2011, a small one off payment of $X was made to your client from Fund C and an amount of tax was withheld.

In late 2011, the remaining balance of Fund C was transferred to Fund A and your client's account with Fund C was closed.

Under the rules of the above 3 funds, benefits are only payable when members reach a certain age.

You have advised that when your client reaches that age, your client will most likely transfer the monies in Fund A to another foreign superannuation fund and take a minimum withdrawal (pension or annuity) each year until the funds are depleted.

Relevant legislative provisions

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 108-5

Income Tax Assessment Act 1997 Division 128

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

Income Tax Assessment Act 1997 Section 301-95

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Section 302-65

Income Tax Assessment Act 1997 Section 305-55

Income Tax Assessment Act 1997 Section 305-60

Income Tax Assessment Act 1997 Section 305-65

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Subsection 960-50(1)

Income Tax Assessment Act 1997 Subsection 960-50(4)

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 42

Superannuation Industry (Supervision) Act 1993 Section 45

Superannuation Industry (Supervision) Act 1993 Section 62

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

Summary

The transfer from Fund B to Fund A is not assessable income and not exempt income.

The one off lump sum payment of $X from Fund C is not assessable income.

Any income stream that commences to be paid from your client's foreign fund will be assessable as foreign income. Where the income stream is taxed by the foreign country, your client will be entitled to a foreign tax offset in respect of foreign tax paid when the income stream is included as assessable income in the relevant year of income.

Detailed Reasoning

1. Lump sum payments transferred from foreign superannuation funds

Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) deals with superannuation benefits paid from foreign superannuation funds.

Section 305-55 of the ITAA 1997 restricts the application of the subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax free. It is not assessable income and is not exempt income (sections 305-60 and 305-65 of the ITAA 1997).

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency or termination of foreign employment, section 305-70 applies to include any applicable fund earnings in assessable income.

Before determining whether an amount is exempt under sections 305-60 or 305-65 of the ITAA 1997, or 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 subdivision 305-B of the ITAA 1997 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.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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.

However, part of the definition of a foreign superannuation fund also requires consideration of what constitutes a superannuation or retirement fund.

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), which requires that the fund is a provident, benefit, superannuation or retirement fund.

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v. Federal Commissioner of Taxation (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. Federal Commissioner of Taxation (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 following 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.

Therefore, in order for the lump sum payment from the overseas fund to be considered a payment from 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 but must be a provident, benefit, superannuation or retirement fund as discussed above.

In this case, information provided indicates that benefits in Funds A, B and C cannot be accessed for pre-retirement purposes and are payable upon retirement and death. Therefore Funds A, B and C meet the definition of a superannuation fund. In addition, it is clear that Funds A, B and C are established outside of Australia, with their central management and control outside of Australia.

Therefore, on the basis of the information provided, the Commissioner considers Fund A, Fund B and Fund C are foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997.

Under subsection 305-70(4) of the ITAA 1997, any part of a lump sum that is paid from one foreign superannuation fund to another superannuation fund is not assessable income and not exempt income. However, as the note to subsection 305-70(4) provides, a person's 'applicable fund earnings' in relation to a later lump sum payment out of the other foreign superannuation fund may include an amount (previously exempt fund earnings) attributable to the lump sum.

Consequently, there is no tax payable on the amount transferred from Fund B to Fund A. Any tax payable in this case, is deferred until the benefit exits the foreign superannuation environment and paid to your client, or into a complying superannuation fund on behalf of your client.

Please note, in answer to the question raised as to whether sections 302-60 or 302-65 of the ITAA 1997 relating to death benefits paid to dependants, have any application in this case, please be advised that these latter provisions only apply to superannuation death benefits received by members of complying funds. As foreign superannuation funds are not complying funds, these provisions have no application in this case.

2. Assessable income - ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The characteristics of income include receipts that:

· are earned

· are expected

· are relied upon

· have an element of periodicity, recurrence or regularity

These factors are not present in the lump sum of $X your client received as it is a one-off payment. As a general rule, the fact that an amount is a one-off lump sum is an indicator of it being a capital payment. The information you have provided indicates the payment your client received is capital in nature. Thus, it is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Assessable income - capital gain

If an amount is not ordinary income, it may still be included in assessable income by virtue of section 6-10 of the ITAA 1997 (statutory income), or by another provision contained in the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.

Receipt of a lump sum payment may give rise to a capital gain.

Division 128 of the ITAA 1997 sets out the capital gains tax (CGT) consequences of death. Also, it sets out the rules where a CGT asset passes through a deceased estate and where subsequently it is subject to a CGT event in the hands of a legal personal representative or beneficiary of the estate.

Section 108-5 explains that a CGT asset is any kind of property or a legal or equitable right that is not property. The deceased held rights as a member of Fund B and on their death, these rights passed to your client as a beneficiary. This change in ownership triggered a CGT event which would ordinarily mean a capital gain or capital loss would result.

However, section 128-15 states that a capital gain or capital loss from a CGT event that results for a CGT asset owned just before dying is disregarded.

Accordingly, the lump sum amount of $X is not assessable as statutory income under section 6-10 of the ITAA 1997.

As the lump sum amount of $X is not taxable in Australia, your client is not entitled to a credit for tax withheld in the foreign country. We suggest that you contact the relevant foreign authority for further assistance in this regard.

3. Assessability of RRIF income stream

Income sourced in an overseas country is considered to be foreign sourced income when paid to an Australian resident for tax purposes. In determining your client's liability to pay tax in Australia, it is necessary to consider not only our domestic income tax laws, but also any applicable double tax agreements that exist between the foreign country and Australia.  Section 4 of the International Tax Agreements Act 1953 (Agreements Act) explains that should there be inconsistencies in applying the domestic tax laws, the Agreements Act will override those laws.

Section 5 of the Agreements Act explains that any provision in an Agreement listed in section 5 has the force of law. The agreement between Australia and the foreign country is listed in section 5 of the Agreements Act and so has the force of law in relation to your client's income from that foreign country.

However, the relevant provision of the foreign country agreement does not allocate the sole taxing rights over pensions and annuities to either the country from which the pension or annuity is derived, or to the country in which the recipient of the pension or annuity is a resident for taxation purposes. As such, where a resident of Australia for taxation purposes derives a pension or an annuity from that foreign country, that pension or annuity may be taxable in that foreign country and Australia. We therefore refer to our domestic tax laws for further guidance.

Subsections 6-5(1) and 6-5(2) of the ITAA 1997 provide that the assessable income of a taxpayer who is a resident of Australia for taxation purposes includes income according to ordinary concepts (ordinary income), derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Pension or annuity income is ordinary income for the purposes of subsections 6-5(1) and 6-5(2).

As your client is an Australian resident, any pension or annuity from the foreign country your client receives, is to be included in your client's assessable income in the year of receipt under section 6-5 of the ITAA 1997.

Elimination of double taxation

Relevant provisions of the agreement also discuss the elimination of double taxation and explain that Australia will allow a credit to its residents for tax paid under the law of that foreign country on income sourced from that foreign country to offset the Australian tax payable on that income.

Foreign income tax offset

Entitlement to claim a foreign income tax offset is determined in accordance with subsection 770-10(1) of the ITAA 1997, which provides that you are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

Accordingly, an entitlement to a foreign income tax offset arises where:

· you have included an amount in your assessable income for the year; and

· you have paid foreign income tax in respect of an amount that is all or part of the amount so included.

Accordingly, should any income your client receives from their foreign superannuation fund be taxed by the foreign country, your client will be entitled to a foreign income tax offset in respect of foreign tax paid in that country, under section 770-10 of the ITAA 1997.