Edited version of your written advice

Authorisation Number: 1012950431431

Date of advice: 2 February 2016

Ruling

Subject: Superannuation funds

Question

Is a superannuation scheme (the Scheme) a 'foreign superannuation fund' for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

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 Scheme was established overseas by the execution of a trust deed and rules (the Deed).

The trustee of the Scheme (the Trustee) was incorporated overseas.

The Directors of the Trustee are all foreign nationals residing overseas.

The Deed provides that:

• The Trustee must maintain the Scheme solely for the purpose of making provision for benefits to be paid to members on their retirement.

• The Scheme is established as an Indefinitely Continuing retirement scheme.

• Benefits to members are payable in the form of a life time pension or, if the member so elects, a lump sum.

• Benefits are payable to members on the happening of any of the following events:

• attaining the age of 65 years;

• cessation of Gainful Employment for a period of at least six months and the Trustee is reasonably satisfied that the member will never again become gainfully employed on full-time or part-time basis;

• total and permanent disability where the member has ceased Gainful Employment and the Trustee is satisfied that the member will never again become gainfully employed on full-time or part-time basis; and

• death of a member before or after retirement.

The Deed was recently amended. Relevantly, the Deed, as amended, states:

(a) The Trustees must maintain the Scheme solely for the purposes of making provision for benefits to be paid to Members in their retirement.

(b) Each Member who retires on or after Normal Retirement Date is entitled to an annual pension for life commencing from actual retirement in accordance with this Section provided always that benefits can only be paid before age 65 where the Member has ceased to be in Gainful Employment for a period of at least six months and the Trustees are reasonably satisfied that the Member intends never to again enter Gainful Employment on a full-time or part-time basis.

(c) A Member will become entitled to a benefit from the Plan prior to Normal Retirement Date where the requirements …

…where the Member has not reached age 55, payment of benefits may commence before Normal Retirement Date if the Trustees are satisfied, having received advice from a registered medical practitioner, that the Member is suffering from Incapacity.

Where a Member's Normal Retirement Date is later than age 55, retirement benefits may commence from age 55 with the consent of the Trustees provided always that the Member has ceased to be in Gainful Employment for a period of at least six months and the Trustees are reasonably satisfied that the Member intends to never again enter Gainful Employment on a full-time or part-time basis."

Normal Retirement Date is defined the Deed as :

…the selected retirement age specified in the Membership Letter which can be no earlier than age 55 or later than 75 years. If before age 65, it must be on ceasing Gainful Employment. The CIT, may at his discretion, allow a Member to retire after reaching normal retirement age provided that the Member's age does not exceed seventy-five years or at any age as the CIT deems acceptable from time to time.

Gainful Employment is defined in the Deed as 'employment or self-employment for gain or reward in any business, trade or profession, vocation, calling or occupation'.

It is stated that:

• the Deed and the Amended Deed were signed overseas; and

• the initial contribution was paid and accepted by the Trustee into the Trustee's bank account overseas.

The Scheme will accept contributions from members who are Australian tax residents as well as from members who are not Australian tax residents.

Contributions will be paid to, and accepted by the Trustee, into bank accounts located outside of Australia.

The Trustee's board meetings are held outside of Australia.

Relevant legislative provisions

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

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

Further issues for you to consider

Not applicable.

Anti-avoidance rules

Not applicable.

Reasons for decision

Summary

On the basis of the information provided, the Commissioner considers the Scheme to be a foreign superannuation fund for Australian income tax purposes.

Detailed Reasoning

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).

In accordance with subsection 10(1) of the SISA, 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) 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.

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 (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 accordance with section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for one or more of the 'core purposes'; or one or more of the 'core purposes' and one or more of the 'ancillary purpose', namely for the provision of benefits to a member on or after:

• the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which they were engaged; or

• the member attaining the age specified in the regulations; or

• the member's death (this may require the benefits being passed on to a member's dependents or legal representative); or

• the termination of the member's employment with an employer who had, at any time, contributed to the fund in relation to the member; or

• the member's cessation of work for gain or reward on account of ill-health.

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.

Based on the information provided, the Scheme is considered to be a superannuation fund. That view is based on the following factors:

• the Scheme is an indefinitely continuing fund;

• it was set up for the provision of a narrow range of superannuation benefits similar in nature to the benefits provided under the SISA; and

• benefits are not paid for purposes other than those relating to termination and retirement.

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.

The Commissioner's interpretation of the definition of 'Australian superannuation fund' in subsection 295-95(2) of the ITAA 1997 is given in Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9).

In accordance with paragraph 2 of TR 2008/9, there are three tests that a fund must satisfy in order to be treated as an 'Australian superannuation fund' as defined in subsection 295-95(2) of the ITAA 1997. They are:

• fund is established in Australia or any asset of the fund is situated in Australia; and

• central management and control of the fund is 'ordinarily' in Australia; and

• the 'active member' test.

The three tests must be satisfied at the same time. If a fund fails to satisfy any one of the tests at a particular time it is not an Australian superannuation fund at that time, even if the other tests are met.

Test 1: fund established in Australia or assets in Australia

The first test will be satisfied if the superannuation fund is established in Australia, or at a particular time any asset of the fund is situated in Australia.

A superannuation fund is established in Australia if the initial contribution made to establish the fund is paid to and accepted by the trustee of the fund in Australia. The establishment of the fund requirement is a once and for all requirement. That is, once it is determined that a fund was established in Australia, it will satisfy the first test at all relevant times.

If a superannuation fund was not established in Australia, it will still satisfy the test in paragraph 295-95(2)(a) of the ITAA 1997 if at least one asset of the fund is situated in Australia at the relevant time. The location of an asset is determined by reference to the type of asset and the common law rules established by the courts for determining the location of assets of that kind.

In paragraph 105 of TR 2008/9, the Commissioner discusses the general rules for determining the site or location of particular types of assets and relevantly states:

• simple contract debts - the general rule applicable to debts is that they are deemed to be situate where the debtor resides.³⁷ This will apply irrespective of the location of the documentary evidence recording the debt.³⁸

• bank accounts - a bank account is a debt being a single chose in action.⁴⁰ The bank is the relevant debtor in the relationship.⁴¹ The rules that apply to determine the location of debts would therefore apply to bank accounts.

In this case, it is stated that the initial contribution was paid into a bank account (and accepted by the Trustee) outside of Australia. As such, the Scheme was established overseas and not in Australia.

Further, the bank account into which the initial contribution was paid is the only asset of the Scheme. Applying the general rules for determining the location of this type of asset (debt), the asset is deemed to be held overseas and not Australia.

As the Scheme was not established in Australia; and its assets are not held in Australia, the Scheme fails the first test in subsection 295-95(2) of the ITAA 1997. As subsection 295-95(2) requires that all of the tests must be met, it is not necessary to consider the other two tests. Therefore, the Scheme is not an Australian superannuation fund as defined in subsection 295-95(2).

Consequently, the Commissioner considers that the Scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.