Edited version of your written advice

Authorisation Number: 1051200562619

Date of advice: 8 March 2017

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1

Is the retained growth in the Overseas Fund assessable income in Australia for the years up to and including the 2016 income year?

Answer

No.

Question 2

Is any part of the lump sum benefit to be received by you from the Fund included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2007

Income year ended 30 June 2008

Income year ended 30 June 2009

Income year ended 30 June 2010

Income year ended 30 June 2011

Income year ended 30 June 2012

Income year ended 30 June 2013

Income year ended 30 June 2014

Income year ended 30 June 2015

Income year ended 30 June 2016

Income year ending 30 June 2017

The scheme commences on:

1 July 2006

Relevant facts and circumstances

You are an Australian resident for tax purposes.

During the period 1998 to 2002 you were a resident of an overseas country and worked for Company 1. That company was later taken over by Company 2.

Whilst you were employed with Company 1 (and later Company 2) they were obliged to make contributions to the Overseas Fund, an offshore retirement benefits plan which they established for you at no cost.

The Overseas Fund has also been established for other employees who fulfilled the criteria set out by the firm and only employees of Company 1/Company 2 were entitled to join the Overseas Fund.

The Overseas Fund is an offshore retirement benefits plan that provides flexibility to non-domiciled employees. It is also an offshore plan with 'corresponding acceptance'.

'Corresponding acceptance' is only available after approval is received from the government of the overseas country. Without approval, the employer's contributions to the Fund would be regarded as part of the employee's taxable emoluments for the individual resident in the overseas country.

The contributions that were made by your employer to the Overseas Fund were a percentage of your remuneration. In keeping with the requirement of an overseas 'corresponding' plan, there are specific limits on the input to the Overseas Fund or benefits from the Overseas Fund.

Documentation provided shows that benefits in the Overseas Fund could not accessed for purposes other than death, invalidity or retirement.

Contributions were paid into the Overseas Fund during the relevant period.

The value of your benefits in the Overseas Fund as at the day before you became a permanent resident of Australia was a certain figure.

No contributions have been made to the Overseas Fund by you or anyone on your behalf since your became an Australian resident.

You wish to directly transfer your benefits in the Overseas Fund to your complying superannuation fund in Australia during the 2016-17 income year.

You were previously issued a private ruling, which confirms that the Overseas Fund is a foreign trust because it is a trust that is not an Australian trust or a resident Part IX entity (subsection 481(3) and section 473 and 477).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Subsection 6-15(1)

Income Tax Assessment Act 1997 section 10-5

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 1936 subsection 481(3)

Income Tax Assessment Act 1936 section 518

Income Tax Assessment Act 1936 section 519

Income Tax Assessment Act 1936 section 529

Reasons for decision

Summary

The Overseas Fund falls within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will apply in this instance.

The Overseas Fund is a foreign trust as defined in subsection 481(3) of the ITAA 1936 and, for the relevant income years, i.e. 2005-06 to 2009-2010, was a foreign investment fund (FIF).

If the lump sum payment you intend to make from the Overseas Fund in the 2016-17 income year results in positive 'applicable fund earnings' that amount will be included as assessable applicable fund earnings in your tax return for the income year in which the transfer is made.

As you indicate you will no longer have an interest in the Overseas Fund after the transfer ids made, you will be eligible to make an election to have all or part of the applicable fund earnings treated as assessable income of your complying Australian superannuation, the Chan Superannuation Fund, provided you satisfy the conditions in section 305-80 of the ITAA 1997

Detailed reasoning

Question 1

Foreign investment fund (FIF) provisions - general

The foreign investment fund (FIF) rules were repealed by the Tax Laws Amendment (Foreign Source Income Deferral) Bill (No 1) 2010 which received royal assent as Act No 114 of 2010. This Act repealed the FIF rules and the deemed present entitlement rules in relation to the 2010-11 and later income years.

Therefore from 1 July 2010 Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trusts no longer need to include income on an attribution basis under the FIF rules.

We issued a ruling in which we ruled that you will not be subject to the FIF provisions in respect of any income or gains accrued the Fund. In other words, no amount would be included in your assessable income for the period 1 July 2002 to 30 June 2006.

The FIF rules were repealed with effect from the 2011 income year onwards and were not replaced. You have asked us to rule for the years 2007 to 2017. We shall consider the years 2007 to 2010 under the old FIF rules and then consider the years 2011 to 2016 under subsection 6-15(1) of the ITAA 1997 which provides that if an amount is not ordinary income and is not statutory income, it is not assessable income.

As you wish to transfer the funds in your Overseas Fund to your complying super fund in Australia before 30 June 2017, we shall consider the 2017 income year separately.

Years 2007 to 2010 (1 July 2006 to 30 June 2010)

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

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those statutory amounts that form part of assessable income. Included in this list was section 529 of the Income Tax Assessment Act 1936 (ITAA 1936), which dealt with income from foreign investment funds (FIF) until 30 June 2010.

Section 529 of the ITAA 1936 was the operative provision of the FIF measures, contained in Part XI of the ITAA 1936. Subsection 529(2) of the ITAA 1936 provided that if foreign investment fund income accrued to a taxpayer under section 529 of the ITAA 1936 in respect of a notional accounting period of a FIF, then, for the income year in which the notional accounting period ended, the taxpayer's assessable income would include:

(a) the whole of the foreign investment fund income amount (if the taxpayer was a resident throughout the whole of the notional accounting period), or

(b) if the taxpayer was a resident throughout part or parts of the notional accounting period, an amount determined according to the formula set out in subsection 529(2) of the ITAA 1936.

Section 529 of the ITAA 1936 applied subject to section 485 of the ITAA 1936 which set out when a taxpayer's interest in a FIF would be subject to taxation under the FIF rules. A FIF is a foreign company or foreign trust (subsection 481(1) of the ITAA 1936).

The Overseas Fund is a foreign trust because it is a trust that is not an Australian trust (subsection 481(3) of the ITAA 1936).

An interest in a FIF was subject to the FIF measures for a notional accounting period that ended in the taxpayer's year of income if the taxpayer -

(a) held the interest at the end of the year of income, and

(b) was a resident at any time during that year of income.

Therefore your interest in a foreign trust that is a FIF would be subject to attribution under Part XI unless one of the exemptions to the FIF rules applied.

Division 11 of Part XI provided an exemption where there was an interest in a non-resident employer-sponsored superannuation fund. To obtain this exemption, the following requirements were required to be met (sections 518 and 519 of the ITAA 1936);

● The taxpayer must be a natural person.

● The taxpayer must be an employee or former employee of the employer.

● The FIF must be a superannuation fund maintained by the taxpayer's employer, or an associate of that employer, for the benefit of their employees.

In your case it is accepted that the Overseas Fund is a superannuation fund that was maintained by your employer as an employer-sponsored superannuation fund. This is because the Overseas Fund was funded by your employer during the period you worked for them and it was set up by your employer to benefit you (the employee) upon reaching retirement age.

Consequently, as you will not be subject to the FIF provisions in respect of any income or gains accrued in your Overseas Fund for the period 1 July 2006 to 30 June 2010, no amount will be included as assessable income under subsection 6-10(4) of the ITAA 1997 for that period.

Years 2011 to 2016 (1 July 2010 to 30 June 2016)

Subsection 6-5(2) and 6-10(4) of the ITAA 1997 provide that the assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income.

Ordinary income

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.

As you have not received any payment from the Overseas Fund, you did not receive any ordinary income.

Statutory income

Statutory income is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). As mentioned above, section 10-5 of the ITAA 1997 lists those provisions. A growth in a foreign employer sponsored superannuation fund is not listed.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income.

In your case, as any growth in a foreign employer sponsored superannuation fund is not ordinary income or statutory income, any growth in your Overseas Fund account is not assessable income under subsection 6-15(1) of the ITAA 1997.

Therefore no amount will be included as assessable income under subsections 6-5(2) or 6-10(4) of the ITAA 1997 for the period 1 July 2010 to 30 June 2016.

Question 2

Year 2017

As explained above, there will be no assessable income for you as a result of any growth in your Overseas Fund until 30 June 2016. For the 2017 income year this will apply from 1 July 2016 until the transfer occurs. We shall now examine what happens when the funds are transferred from your Overseas Fund to your complying super fund in Australia.

Lump sum payments from foreign superannuation funds

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 will operate to include the applicable fund earnings in the person's assessable income.

However, before determining whether an amount is assessable under subsection 305-70(2) 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 subsection 305-70(2) of the ITAA 1997 will not have any application.

In your case, information available, including your previous private ruling, indicates that the Overseas Fund is a superannuation fund. Accordingly, the Overseas Fund falls within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 and the assessable amount of a lump sum payment from the Overseas Fund is so much of the lump sum's applicable fund earnings.

The applicable fund earnings, which represents the growth of your benefits in the Overseas Fund from date just before you became a resident of Australia for tax purposes to the date the benefits are transferred to Australia, is subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

Based on the facts provided, you were not an Australian resident at all times during the relevant period to which the lump sum relates. Therefore, the calculation of the applicable fund earnings should be done with reference the formula in section 305-75(3) of the ITAA 1997.

For the purposes of section 305-70 of the ITAA, the 'applicable fund earnings' should be calculated by:

● translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars; and

● deducting from this amount, the amount vested in the foreign fund just before the day you first became an Australian resident at the exchange rate applicable on the day of receipt of the lump sum.

Election

A taxpayer who is transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the applicable fund earnings treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal tax rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1) of the ITAA 1997).

As you have indicated that you will no longer have an interest in the Overseas Fund after making the transfer, and provided the above conditions are met, you will be eligible to make the election.