Edited version of your written advice

Authorisation Number: 1012898848925

Date of advice: 22 October 2015

Ruling

Subject: Lump sum payment from a foreign superannuation fund.

Question 1

Does the Overseas Fund meet the definition of a foreign superannuation fund under subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will a lump sum transfer from the Overseas Fund received within 6 months of your client becoming an Australian resident be tax-free under section 305-60 of the ITAA 1997?

Answer

No

Question 3

Is any part of the lump sum payment received from a foreign pension fund included in your client's assessable income?

Answer

Yes

Question 4

Is your client entitled to claim a credit for the tax paid in the overseas country in respect of the lump sum payments?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

Your client permanently left Australia some time ago and became a non-resident for Australian income tax purposes.

Your client holds an interest in an overseas pension scheme (the Overseas Fund).

Relevant to the present case, the Overseas Fund provides withdrawal conditions such as:

• You can withdraw after-tax contributions from your account at any time, for any reason.

• Unreimbursable medical expenses for you, your spouse, or your dependents

• Purchase of your principle residence

• Tuition and related fees for post-secondary education for you, your spouse, or your dependents

Your client intends to migrate to Australia during the 2015-16 income year.

Your client intends to transfer the benefits in the Overseas Fund within 6 months of becoming an Australian resident.

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 10-5

Income Tax Assessment Act 1997 section 99B

Income Tax Assessment Act 1997 subsection 99B(1)

Income Tax Assessment Act 1997 paragraph 99B(2)(a)

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

Income Tax Assessment Act 1997 section 305-60

Income Tax Assessment Act 1997 subsection 770-10(1)

Income Tax Assessment Act 1997 subsection 770-15(1)

Income Tax Assessment Act 1997 section 770-70

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 Overseas Fund is not a 'superannuation fund' as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), as it can be accessed for pre-retirement purposes. Accordingly it will not meet the definition of an Australian superannuation fund under subsection 295-95(2) of the ITAA 1997.

A lump sum payment that your client will receive from the Overseas Fund is not considered to be a payment from a 'foreign superannuation fund' therefore; subdivision 305-B of the ITAA 1997 has no application in this case.

The assessable or taxable amount is the total amount received less any amounts deposited to the fund (the capital) by your client or on their behalf. The principle is that your client is taxed only on the earnings of the investment, not on the capital amount returned to them on withdrawal.

A foreign income tax offset can be claimed for foreign income tax paid by your client in respect of an amount that is included in their assessable income

Detailed reasoning

Under section 305-60 of the Income Tax Assessment Act 1997 (ITAA 1997), a superannuation lump sum you receive from a foreign superannuation fund is non-assessable, non-exempt income if:

(a) you receive it within 6 months after you become an Australian resident; and

(b) it relates only to a period:

(i) when you were not an Australian resident; or

(ii) starting after you became an Australian resident and ending before you receive the payment; and

(c) it does not exceed the amount in the fund that was vested in you when you received the payment.

Before determining whether section 305-60 of the ITAA 1997 applies, it is necessary to ascertain whether the entity making the payment is a foreign superannuation fund.

Meaning of '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 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 Australia would qualify as a foreign superannuation fund. The fact that some of its members may be Australian residents would not necessarily alter this.

The meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (the SISA).

Subsection 10(1) of the SISA provides that:

superannuation fund means:

(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 meaning of '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 judgment 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 SISA, 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 SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and the Superannuation Industry (Supervision) Regulations 1994 (SISR)) 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 SISA.

Information available indicates that the benefits in the Overseas Fund can be accessed for pre-retirement purposes. For example, a member can withdraw their after-tax contributions from their account as any time, for any reason.

As the benefits in the Overseas Fund can be accessed for pre-retirement purposes, the Overseas Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

Therefore, on the basis of the information provided, the Commissioner considers that a lump sum payment from the Overseas Fund will not be received from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Consequently, Subdivision 305-B of the ITAA 1997 does not apply to the lump sum payment that your client will receive from the Overseas Fund.

Tax consequences of proceeds from a foreign trust

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

• are earned

• are expected

• are relied upon, and

• have an element of periodicity, recurrence or regularity.

Lump sum payments from investment or retirement funds/plans do not have the characteristics of ordinary income and are not assessable under section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable 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 in Australia.

In the case of investment or retirement funds/plans, we consider that a 'trust' relationship exists as the financial services provider holds property, such as cash or shares, for the benefit of the investor. When the investor receives funds from the investment/plan, it is considered to be the same as receiving a distribution from a trust.

Therefore, a person receiving funds from a foreign investment or retirement fund/plan is taxed under section 99B of the ITAA 1936 as the income has not previously been subject to tax in Australia.

Specifically, subsection 99B(1) of the ITAA 1936 provides that where 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, the amount is to be included in the assessable income of the beneficiary.

However, paragraph 99B(2)(a) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income is not to include any amount that represents the corpus (capital) of the trust.

Consequently, the assessable or taxable amount is the total amount received less any amounts deposited to the fund (the capital) by your client or on their behalf. The principle is that your client is taxed only on the earnings of the investment, not on the capital amount returned to them on withdrawal.

Therefore, it will be the gross amount withdrawn converted to Australian dollars, less the amount that represents deposits to the fund converted to Australian dollars, which is the amount subject to Australian tax.

Foreign Income Tax Offset

Section 770-10 of the ITAA 1997 provides that a foreign income tax offset can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains (section 770-15 of the ITAA 1997). Your client must have paid the foreign income tax before an offset is available. Your client is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source (section 770-130 of the ITAA 1997).

If your client is claiming a foreign income tax offset of more than $1,000, they will have to work out their foreign income tax offset limit. This may result in the tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to your client (section 770-75 of the ITAA 1997).

If claiming an offset of $1,000 or less, your client does not need to work out a limit and only needs to record the actual amount of foreign income tax paid.