Edited version of private advice

Authorisation Number: 1012651740875

Ruling

Subject: Withdrawal of funds from overseas retirement fund

Questions and Answers

1. Is the overseas fund a 'foreign superannuation scheme' under subsection 305-55(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No

2. Are there any income tax consequences as a result of withdrawing funds from the overseas fund?

Yes

3. Is the assessable amount the value at the date of withdrawal less your and your employer's contributions to the fund?

Yes

This ruling applies for the following period

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You worked for a company in Country A for several years until date X in the relevant income year.

You have been a member of an International Retirement Plan (overseas fund) since you began your employment.

Both you and your employer have contributed to the overseas fund.

The overseas fund's rules required you to withdraw your benefit. As a result you transferred this benefit to an offshore account in Country B on date Y in the relevant income year.

The overseas fund's rules provide benefits in the overseas fund can be accessed at any time and can be used for pre-retirement withdrawals for general non-retirement purposes such as hardship, housing, education and medical expenses in respect of your dependants et cetera.

The overseas fund's rules also indicate a benefit will only become payable at the date of retirement, or the date a member dies or in certain hardship situations.

You plan to make withdrawals from your Country B account and transfer all your retirement funds from that account to an Australian bank account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1936 Subsection 99B(1)

Income Tax Assessment Act 1936 Subsection 99B(2)

Income Tax Assessment Act 1936 Subsection 97

Income Tax Assessment Act 1997 Section 305-55

Income Tax Assessment Act 1997 Subsection 305-55(2)

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

Income Tax Assessment Act 1997 Section 295-95

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section19

Superannuation Industry (Supervision) Act 199 Section 62

Reasons for decision

Section 305-55 of the Income Tax Assessment Act 1997 (ITAA 1997), which deals with the 'Restriction to lump sums received from certain foreign superannuation funds' in Subdivision 305-B of the ITAA 1997, states:

(1) This Subdivision applies if:

(a) you receive a superannuation lump sum from a foreign superannuation fund (emphasis added); and

(b) the fund is an entity mentioned in item 4 of the table in subsection 295-490(1) (which deals with deductions for superannuation entities).

(2) This Subdivision also applies if you receive a payment, other than a pension payment, from a scheme (emphasis added) for the payment of benefits in the nature of superannuation upon retirement or death that:

(a) is not, and never has been, an Australian superannuation fund or a foreign superannuation fund; and

(b) was not established in Australia; and

(c) is not centrally managed or controlled in Australia.

(3) This Subdivision applies to a payment mentioned in subsection (2) from a scheme mentioned in that subsection in the same way as it applies to a superannuation lump sum from a foreign superannuation fund.

In view of the above, one of the main items to be ascertained is whether the overseas fund, the source from which your lump sum payment is made, is a foreign superannuation fund.

Is your overseas fund a foreign superannuation fund?

Under subsection 995-1(1) of the ITAA 1997 a foreign superannuation fund is defined as:

(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 995-1(1) of the ITAA 1997 also defines an Australian superannuation fund as having the meaning given by section 295-95, that is basically, a fund that was established in Australia and its central management and majority of active members are located in Australia.

Further, it should be noted that subsection 995-1(1) of the ITAA 1997 also defines a superannuation fund as having the 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

(b) a public sector superannuation scheme. (emphasis added)

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:

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

(b) attaining a prescribed age; and

(c) 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 hardship, 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 a foreign 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:

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

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

In this case, the information provided indicates that benefits in the overseas fund can be accessed at any time and can be used for pre-retirement withdrawals for general non-retirement purposes such as hardship, housing, education and medical expenses in respect of your dependants.

Though the overseas fund is foreign based and controlled, and also provides retirement benefits, it is not considered a foreign superannuation fund. The overseas fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purpose.

As the overseas fund is not a foreign superannuation fund for the purposes of the ITAA 1997, or a scheme for the payment of superannuation benefits, section 305-55 of the ITAA 1997 does not apply in your case. Accordingly, the tax treatment of the payment (withdrawal) made from your overseas fund requires consideration under other provisions of the ITAA 1997and Income Tax Assessment Act 1936 (ITAA 1936).

Withdrawal from overseas fund

You were required to withdraw your benefit from overseas fund. There are income tax consequences when this happened date on date B which will affect your relevant tax return.

In order to calculate the amount to include in your assessable income as a result of the withdrawal from the overseas fund, it is necessary to consider both section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) as well as section 99 of the ITAA 1936.

Section 97 of the ITAA 1936

Section 97 of the ITAA 1936 applies to include in the assessable income of a beneficiary of a trust estate, who is not under a legal disability and is presently entitled to a share of the income of a trust estate, their share of the net income of the trust estate.

Subsection 97(1) of the ITAA 1936 applies in your case to any growth in the overseas fund from 1 July 20XX, as during the period you were a resident beneficiary who was not under a legal disability and who would have been presently entitled to income.

As the withdrawal happened on date Y in the relevant income year, under this provision, you are required to include in your assessable income any growth in the overseas fund between 1 July 20XX and date Y.

In addition, you need to include income which is assessable under section 99B of the ITAA 1936.

Section 99B of the ITAA 1936

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 received 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.

When an amount is distributed to the beneficiary, subsection 99B(1) of the ITAA 1936 applies to include in the beneficiary's assessable income the distribution less any amounts excluded under subsection 99B(2) of the ITAA 1936.

Subsection 99B(2) of the ITAA 1936 provides that the amount to be included in assessable income under subsection 99B(1) of the ITAA 1936 is not to include any amount that represents:

• the corpus of the trust

• amounts that would not have been included in the assessable income of a resident taxpayer who was presently entitled to the amounts at the time they were derived by the trust and

• amounts previously included in the beneficiaries income under section 97 of the ITAA 1936. Section 97 of the ITAA 1936 requires a trust beneficiary to include in their assessable income the share of the net income of the trust to which they are presently entitled.

In your case the withdrawal of funds from your overseas fund on date Y constitutes a distribution from a foreign trust and is assessable under subsection 99B(1) of the ITAA 1936. The contributions you made and your employer made constitute corpus of the trust.

The assessable amount to include in your relevant tax return is the value of the withdrawal (as at date Y) reduced by your and your employer's contributions and any amounts of income which you have already included under section 97 of the ITAA 1936 for the period 1 July 20XX to date Y.

Under the Country A Convention, the amounts withdrawn from an overseas fund are taxable in Australia but may also be taxed in the country of source (in Country A).

Note:

It is considered you were not presently entitled to any income from the fund prior to the withdrawal of the monies as based on the overseas fund's rules a benefit will only become payable at the date of retirement, or the date a member dies or in certain hardship situations. Thus section 97 of the ITAA 1936 would not apply in relation to any gains made before the start of the income year in which the withdrawal occurred (gains before 1 July 2013) such that section 99B could apply to these gains.