Edited version of your written advice

Authorisation Number: 1012913281948

Date of advice: 18 November 2015

Ruling

Subject: Superannuation benefits from foreign superannuation funds

Questions

1. Does Australia have the sole taxing rights on the benefits withdrawn from the Foreign Fund?

2. Would section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the amount withdrawn from the Foreign Fund?

3. If section 305-70 of the ITAA 1997 applies to the withdrawn amount, what is the applicable fund earnings amount in respect of that amount?

Answers

1. Yes.

2. Yes.

3. The Commissioner declines to rule.

This ruling applies for the following period

Income year ending 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts and circumstances

The Taxpayer has been an Australian resident for tax purposes since the 20WW-XX income year.

The Taxpayer became a member of the Foreign Fund in the 20VV-WW income year.

The Foreign Fund was established overseas and its central management and control are overseas.

The Taxpayer cannot access their benefits in the Foreign Fund other than at retirement.

Benefits on retirement are provided in the form of a lump sum and/or a pension.

In the 20WW-XX income year, the Foreign Fund made a pension commencement lump sum payment to the Taxpayer.

In the 20WW-XX income year, the Foreign Fund received two transfers from foreign pension schemes, of which the Taxpayer was a member.

In the 20XX-YY income year, the Taxpayer received an amount as an annual pension from the Foreign Fund.

Since becoming an Australian resident, the Taxpayer has made no contributions to the Foreign Fund.

During the 20YY-ZZ income year, the Taxpayer intends to withdraw in full their benefits in the Foreign Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 52-10(1A)

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 Section 305-80

Income Tax Assessment Act 1997 Section 960-50

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

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Schedule 1 Article 17

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Taxation Administration Act 1953 Section 359-35 of Schedule 1

Reasons for decision

Summary

Australia has the sole taxing rights on the benefits withdrawn by the Taxpayer from the Foreign Fund.

Section 305-70 of the ITAA 1997 would apply to the lump sum amount the taxpayer withdraws from the Foreign Fund.

The 'applicable fund earnings' amount (if any) in respect of the lump sum transferred from the Foreign Fund should be included in the Taxpayer's income tax return for the relevant income year.

Detailed reasoning

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.

Assessable income consists of ordinary income and statutory income provided it is neither exempt nor non-assessable non-exempt income.

Subsection 6-10(2) of the ITAA 1997 provides that an amount is statutory income if it is not ordinary income but is included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists the provisions about assessable income. Included in this list is section 305-70 of the ITAA 1997.

In determining the Taxpayer's liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law.

The agreement operates to avoid the double taxation of income received by residents of Australia and the foreign country.

Under the DTA between Australia and the foreign country in question, the Taxpayer's benefit will only be taxed in Australia.

Lump sum payments transferred from foreign superannuation funds

Section 305-70 of the ITAA 1997 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' in relation to the lump sum (if any) in their assessable income.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as a superannuation fund that is not an Australian superannuation fund.

In accordance with subsection 295-95(2) of the ITAA 1997, 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 …

Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia is not an Australian superannuation fund. Consequently, such a fund would be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

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 (SISA) which states:

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 High Court examined both the terms 'superannuation fund' and 'fund' in Scott v. Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; (1966) 10 AITR 290. 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.

Meaning of 'provident, benefit, superannuation or retirement fund'

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. 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.

In accordance with section 62 of the SISA (Sole purpose test), a regulated superannuation fund must be maintained solely for the provision of benefits specified in subsection 62(1) of the SISA. The 'core purposes' specified in that subsection relate to providing retirement or death benefits for, or in relation to, fund members; and the 'ancillary purposes' relate to the provision of benefits on the cessation of a member's employment, other death benefits and other approved benefits.

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) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

In this case, it is clear that the Foreign Fund was established outside of Australia and that its central management and control are outside of Australia. In addition, the Taxpayer's benefits in the Foreign Fund are only payable upon retirement. As such, the Foreign Fund would meet the definition of a superannuation fund.

Therefore, on the basis of the information provided, the Commissioner considers the Foreign Fund to be a foreign superannuation fund for the purposes of section 305-70 of the ITAA 1997.

Applicable fund earnings

The Taxpayer became a resident of Australia for tax purposes in the 20WW-XX income year and intends to withdraw their entitlements in the Foreign Fund as a lump sum during the 20YY-ZZ income year. As this payment would occur more than six months after the Taxpayer became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in respect of the transfer in their assessable income for the relevant year.

Matters we have not ruled on

The Commissioner declines to rule on Question 3, which relates to the calculation of the amount of applicable fund earnings under section 305-70 of the ITAA 1997.

Under section 359-35 of Schedule 1 of the Taxation Administration Act 1953, the Commissioner must comply with a private ruling application unless there is a basis to decline to make the ruling.

The circumstances when the Commissioner may decline to make a ruling are set out in Practice Statement Law Administration Subject: Provision of advice and guidance by the Australian Taxation Office (PS LA 2008/3).

According to paragraph 101 of the PS LA 2008/3:

101. The Commissioner must comply with a private ruling application unless there is a basis to decline to make the ruling. Without attempting to provide an exhaustive set of circumstances, the Commissioner may decline to make a private ruling if:

making the ruling would prejudice or unduly restrict the administration of a taxation law, for example if:

…

the correctness of a private ruling would depend on an assumption about a future event or some other matter and it is considered inappropriate to make a private ruling on the basis of that assumption

In the present case, Question 3 requires the Commissioner to make assumptions in relation to the date the transfer is to occur; the value of the Taxpayer's interest in the Foreign Fund on the date of the eventual transfer; and the applicable currency exchange rate on the date of the transfer. The Commissioner does not consider it appropriate to make those assumptions.