Edited version of your written advice

Authorisation Number: 1012991268503

Date of advice: 31 March 2016

Ruling

Subject: Lump sum from a foreign fund

Question 1

Is any part of the lump sum payment received by the Taxpayer from a foreign pension plan (the Overseas Fund) assessable as applicable fund earnings in accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the lump sum payment received from the Overseas Fund assessable under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 3

Can the Taxpayer deduct from their assessable income a net capital loss for any income year under section 102-10(2) of the ITAA 1997.

Answer

No

This ruling applies for the following period

Income year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

The Taxpayer became a resident of Australia for tax purposes many years ago.

While living in an overseas country (the Overseas Country) the Taxpayer became a member of the Fund.

The Fund supplied the Taxpayer with a letter some years after the Taxpayer become an Australian tax resident which provides the value of the Taxpayer’s benefits in that fund, and states that the Taxpayer could not access any of the funds until retirement at age 65 or on prior permanent disablement or death.

Subsequently, the Fund amalgamated with another fund to become the Overseas Fund.

There have been no contributions or pension amalgamation to the Funds since the Taxpayer became an Australian resident for tax purposes.

The Overseas Fund’s rules were obtained.

The Overseas Fund rules sets out when a benefit can be paid to a member upon resignation, dismissal, retrenchment or redundancy from the employer. One of the paragraph’s show if a member’s membership terminates prior to his normal retirement date for any reason other than his retirement, death or transfer, the member’s fund credit shall be paid out in cash.

A lump sum payment was transferred from the Overseas Fund as result of their termination of membership to their personal bank account in Australia.

The Taxpayer no longer has any interest in the Overseas Fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 paragraph 99B(2)(a)

Income Tax Assessment Act 1936 subsection 481(3)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6-10(4)

Income Tax Assessment Act 1997 section10-5

Income Tax Assessment Act 1997 subsection 102-10(2)

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 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 does not meet the definition of a foreign superannuation fund as the fund is not a superannuation fund. Accordingly, section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply to the lump sum payment the Taxpayer received from that fund.

The lump sum received from the Overseas Fund should be treated as a receipt (distribution) of trust income not previously subject to tax and should be assessed in accordance with section 99B of the Income tax Assessment Act 1936 (ITAA 1936).

The Taxpayer cannot deduct from their assessable income a net capital loss for any income year under section 102-10(2) of the ITAA 1997.

Detailed reasoning

Question 1

Lump sum payments transferred from foreign superannuation funds

Section 305-70 of the ITAA 1997 applies to lump sum payments from foreign superannuation funds that are received more than six months after a person has become an Australian resident.

In accordance with either subsections 305-70(2) or of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 of the ITAA 1997, is included in the assessable income of a person.

The applicable fund earnings amount is subject to tax at the person’s marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

An amount is only assessable under section 305-70 of the ITAA 1997 if 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:

(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.

Accordingly, to be a’ foreign superannuation fund’ it must be shown that the foreign fund:

(a) is not an Australian superannuation fund; and

(b) that the foreign fund is a ‘superannuation fund’.

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) which requires that the fund is a provident, benefit, superannuation or retirement fund. In Baker v Federal Commissioner of Taxation [2015] AATA 469 (Baker), O’Loughlin J found that a fund which does not meet the definition of a ‘superannuation fund’ under section 10 of the SISA cannot be a foreign superannuation fund. In that case money could be withdrawn from an IRA at any time prior to any retirement event at the complete discretion of the account holder, which is at odds with the SISA and regulations.

Thus, for the Overseas Fund to meet the definition of a foreign superannuation fund, it must qualify as a fund under the SISA and therefore be a provident, benefit, superannuation or retirement fund.

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) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (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.

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 (Cth) (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.

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 SISA, a regulated superannuation fund must be ‘maintained solely’ for the ‘purposes’ of providing benefits to a member when the events occur:

n on or after retirement from gainful employment; or

n attaining a prescribed age; or

n on or after cessation of work on account of ill-health; and

n on the member’s death (this may require the benefits being passed on to a member’s dependants or legal representative).

Notwithstanding that 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 view of the legislation and the decisions made in Baker, Scott and Mahony, 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.

Pension, provident and preservation funds in the Overseas country are comparable to Australian superannuation funds. The rules surrounding their formation, management and operation are governed an Act (the Act) in the Overseas Country. Unlike the SISA, the Act does not restrict the release of benefits, rather the Act allows the funds to set out their own rules regarding the release of benefits and a section in the Act binds the fund, trustees and members to these fund rules.

The fund rules as they existed at various time through the Taxpayer’s membership, which include the latest rules of the Overseas Fund, have been analysed.

Section 305-70 of the ITAA 1997 uses the phrase (emphasis added):

…superannuation lump sum you receive from a foreign superannuation fund.

It is clear from this wording that the foreign fund must meet this definition of a superannuation fund at the time when the payment is made and therefore whether the fund previously did or did not meet this definition is irrelevant for the purposes of section 305-70 of the ITAA 1997.

The fund’s rules are provided by the Taxpayer, which were in effect when the superannuation lump sum payment was made and therefore the fund under these rules must meet the definition of a foreign superannuation fund for section 305-70 of the ITAA 1997 to apply to the lump sum payment.

The rules set out when a benefit can be paid to a member upon resignation, dismissal, retrenchment or redundancy from the employer. Specifically a paragraph allows for a member’s fund credit to be paid to the member where their membership of the Fund terminates prior to the normal retirement date (set at 65 in the fund rules) for any reason other than retirement, death or transfer.

As the Overseas Fund allows members to withdraw their benefits for reasons other than for retirement purposes it does not meet the definition of a provident, benefit, superannuation or retirement fund and therefore the Overseas Fund is not a superannuation fund per SISA requirements. The Overseas Fund was not a foreign superannuation fund at the time of the lump sum payment and therefore sections 305-5(1) and 305-70 of the ITAA have no application.

It is also considered that 305-55(2) of the ITAA 1997 is not relevant to the Taxpayer. That provision applies if a payment is made from an entity that is not a foreign superannuation fund. However the payment has to be a ‘payment from a scheme for the payment of benefits in the nature of superannuation upon retirement’ when considering the view of the provision taken in Baker which states:

“…for a payment to be a payment from a scheme for the payment of benefits in the nature of superannuation upon retirement the scheme would need to provide for payments that have the essential qualities, character or features of payments of superannuation benefits on retirement. Further, the scheme would need to be such that such payments were more than just possibilities among a range of alternatives such as simple withdrawals available at any time.”

Question 2

Trust 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.

A foreign trust is defined in subsection 481(3) of the ITAA 1936 as a trust which is not an Australian trust, and which did not result from a will or an intestacy in relation to the estate of a deceased person.

In this case the Taxpayer had an Overseas Fund.

The Overseas Fund is not a superannuation fund for the purposes of the ITAA 1997 and the ITAA 1936 as it allows for withdrawals for other purposes than those relating to retirement. Therefore the Overseas Fund is not established solely for the provision of retirement benefits.

The Overseas Fund is a foreign trust as defined in subsection 481(3) of the ITAA 1936 and is therefore a foreign investment fund (FIF).

Repeal of FIF measures

On 14 July 2010, the FIF measures were repealed and do not apply from the 2010-11 income year onwards.

If the Taxpayer has an interest in a FIF, they will be subject to the general tax rules applicable to their circumstances – for example, the general tax rules relating to trust income.

Assessability of trust income

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.

Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, their assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to 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 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.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents either:

● the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)

● amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and

● amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA 1936).

Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).

Therefore, only income accumulated in the Overseas Fund over the years that is normally taxable in Australia and had not been previously subjected to tax in Australia would be assessable to the Taxpayer under subsection 99B(1) of the ITAA 1936. For example, if the amounts in the Overseas Fund were amounts paid in by the Taxpayer and interest earned over the years, all of the interest would be assessable when received by the Taxpayer, but not the Taxpayer’s contributions.

The Taxpayer has received a lump sum payment from the Overseas Fund; as lump sum amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from their Overseas Fund account are assessable under subsection 99B(1) of the ITAA 1936.

Interest charge on distributions of accumulated trust income

An Australian resident may be liable to interest under the Taxation (Interest on Non-resident Trust Distributions) Act 1990, where their assessable income includes an amount from non-resident trust assessed under section 99B of the ITAA 1936.

Subsection 102AAM(1) of the ITAA 1936 may make a taxpayer liable to pay interest to the Commissioner, on distributions from certain non-resident trust estates.

The interest is calculated on the following amount:

(distributed amount x applicable rate of tax) - FTC

"Distributed amount" is the amount included in assessable income of the taxpayer under section 99B of the ITAA 1936 and grossed up by any foreign tax in respect of the distribution.

"Applicable rate of tax" is maximum rate of tax payable by the taxpayer.

"FTC" is the foreign tax credit which is attributable to the amount of the distribution included in the taxpayer's assessable income.

Question 3

Applying capital losses

The Taxpayer’s assessable income for an income year includes any net capital gain they have. The Taxpayer’s net capital gain is calculated in accordance with section 102-5 of the ITAA 1997. The Taxpayer can use capital losses from an income year or previously unapplied capital losses from previous years to reduce their net capital gain.

However, the Taxpayer cannot deduct from their assessable income a net capital loss for any income year (section 102-10(2) of the ITAA 1997).

In this case, a portion of the lump sum payment the Taxpayer has received from the Overseas Fund is assessable income under section 99B of the ITAA 1936. However, in accordance with section 102-10(2) of the ITAA 1997, the assessable amount cannot be reduced by any net capital losses they have.