Edited version of your written advice

Authorisation Number: 1013012889003

Date of advice: 12 May 2016

Ruling

Subject: Transfers from a foreign superannuation fund

Question 1

Is any part of the lump sum benefit received by a person (the Taxpayer) from a foreign pension fund tax free in accordance with section 305-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is any part of the lump sum benefit received by the Taxpayer from a foreign pension fund included in their assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

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 Taxpayer became a permanent resident of Australia on a date in the 2015-16 income year (the Residency Date).

The Taxpayer held an interest in a foreign pension fund (the Pension Fund), which was established and has its head office, central management and control in a foreign country.

Documentation from the Pension Fund indicates that the benefits in the Pension Fund may be accessed:

• at retirement;

• in case of disability, death or termination of employment; and

• to finance the acquisition of property.

There have been no contributions to the Pension Fund since the Taxpayer migrated to Australia.

Less than six months after the Residency Date, the Taxpayer's benefits in the Pension Fund were paid to the Taxpayer as a lump sum.

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 subsection 295-95(2)

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 section 305-55

Income Tax Assessment Act 1997 section 305-60

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 subsection 305-75(2)

Income Tax Assessment Act 1997 subsection 305-75(3)

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

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

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

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 subsection 10(1)

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Summary

The Pension Fund is not a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997. Therefore, section 305-60 of the ITAA 1997 does not apply to the lump sum received by the Taxpayer from the Pension Fund.

The amount included in the Taxpayer's assessable income under subsection 99B(1) of the ITAA 1936 is the gross amount the Taxpayer received (converted to Australian dollars) less the amount that represents the deposits to the Pension Fund (converted to Australian dollars).

Detailed reasoning

Question 1

Lump sum payments from foreign superannuation funds

Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds.

Section 305-55 of the ITAA 1997 restricts the application of Subdivision 305-B of the ITAA 1997 to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

In accordance with section 305-60 of the ITAA 1997, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income. That is, it is tax free.

If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable income.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

However, before determining whether an amount is tax free under section 305-60 of the ITAA 1997 or assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund, then section 305-60 or section 305-70 will not have any application.

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.

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1

Relevantly, 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 …

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1

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.

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).

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.

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 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:

• retirement from gainful employment; or

• attaining a prescribed age; 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 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.

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 and the SISR.

In this case, information available indicates that as well as providing benefits on retirement, invalidity and death, the Pension Fund also provides benefits to purchase a member's home. Because the benefits in the Pension Fund are also paid for other than retirement purposes, the Pension Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

It follows that if the Pension Fund is not a 'superannuation fund', it cannot be a 'foreign superannuation fund'. Consequently, section 305-60 of the ITAA 1997 does not apply to the lump sum received by the Taxpayer from the Pension Fund.

Question 2

Ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, 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.

In this case, the Taxpayer received a lump sum payment from a foreign pension fund. As such, the amount the Taxpayer received did not have the required element of periodicity, recurrence or regularity to be considered ordinary income.

Therefore, the lump sum the Taxpayer received is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Foreign trust income

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the ITAA 1936 which deals with receipt of trust income not previously subject to tax in Australia.

In this case, the Taxpayer received a lump sum payment from a foreign pension fund. With funds of this nature, a 'trust' relationship exists as the fund manager holds property, such as cash or shares, for the benefit of the account holder. When the account holder receives an amount from the fund, it is considered to be the same as receiving a distribution from a trust.

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, that amount is to be included in the assessable income of the beneficiary.

Consequently, lump sum benefit the Taxpayer received from the Pension Fund is assessable under subsection 99B(1) of the ITAA 1936.

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

In this case, that portion of the lump sum that represents amounts previously deposited into the Pension Fund by the Taxpayer, or on the Taxpayer's behalf, will represent the corpus of the trust.

Therefore, it is the gross amount the Taxpayer received converted to Australian dollars, less the amount that represents the deposits to the Pension Fund converted to Australian dollars, that is the amount included in the Taxpayer's assessable income under subsection 99B(1) of the ITAA 1936.