Edited version of your written advice

Authorisation Number: 1051293264813

Date of advice: 11 October 2017

Ruling

Subject: Lump sum payment from a foreign fund

Question

For the purposes of section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997), is a foreign pension fund (the Fund) a foreign superannuation fund?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Some years ago, a person (Your Client) secured a job with a foreign company (the Employer) and relocated overseas.

Your Client became a member of the Employer’s pension fund as part of their remuneration package.

Some years later, Your Client rolled over their existing pension benefits to another of the Employer’s pension funds, (the Fund) a defined benefit scheme established outside Australia.

The Fund is regulated by a deed (the Deed).

In accordance with the terms of the Deed:

● the main purpose of the Fund is the provision of pensions and other benefits on or after retirement (or on death) for employees or classes of employees

● a pension is payable either immediately, or from a future date not later than normal retiring date, because of early retirement or ill-health (physical or mental) for eligible members, provided such a pension does not begin to be payable before the member attains 50 years of age

● benefits are not payable in circumstances other than those relating to retirement.

Your Client has returned to Australia and wishes to transfer their benefits in the Fund to a complying Australian superannuation fund.

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 Subsection 10(1)

Superannuation Industry (Supervision) Act 1993 Section 62

Superannuation Industry (Supervision) Act 1993 Paragraph 62(b)

All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

The Fund is a foreign superannuation fund for the purposes of section 305-70.

Detailed reasoning

Foreign superannuation fund

A foreign superannuation fund is defined in subsection 995-1(1) 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 definitions of asterisked terms, see the Dictionary, starting at section 995-1.

Under the definition of Australian superannuation fund in subsection 295-95(2), 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.

Superannuation fund

‘Superannuation fund’ is defined in subsection 995-1(1) as having the same 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.

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’.

Furthermore, 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.

A similar approach was adopted by Taylor J and Windeyer J who said:

It thus becomes necessary to look carefully and critically at the terms of the trust deed, at what is required and what is permitted – that is to say in what ways the trustees might, without any breach of the trusts it imposes, apply the trust property.

…In other words, if they could, keeping within the terms of the trust, apply the fund or any portion thereof to purposes foreign to the true purposes of such a fund, then it would not be such a fund.

In Baker v FC of T 2015 ATC 10-399; (2015) AATA 469,

…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.

In section 62 of the SISA, a regulated superannuation fund must be ‘maintained solely’ for one or more of the ‘core purposes’ of providing benefits to a member when the events occur:

● on or after retirement from gainful employment; or

● attaining a prescribed age; and

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

In addition, paragraph 62(b) of the SISA allows for a regulated superannuation fund to be maintained solely for one or more of the core purposes and for one or more of the following ancillary purposes of providing benefits to a member when the events occur:

● on or after the member’s termination of employment with an employer who had, at any time, contributed to the fund in relation to the member;

● the cessation of work and the cessation is due to ill-health (whether physical or mental);

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

Notwithstanding that 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.

As reiterated by Justice O’Loughlin in Baker v FC of T 2015 ATC 10-399; (2015) AATA 469 at paragraph 16,

… a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund.

Therefore, in order for the lump sum payment from the overseas fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1), consideration must also turn to the requirements set out in subsection 295-95(2). This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above.

In this case, information provided indicates Your Client's benefits in the Fund are only payable on retirement, the attainment of a prescribed age and death. As you have highlighted, certain regulations under the Deed respectively provide for the payment of a pension in circumstances due to early retirement due to ill health or redundancy and early retirement due to incapacity (physical or mental). The payment of benefits in such circumstances does not change the nature or purpose of the Fund. The payment of such benefits is in the nature of superannuation styled benefits permitted under the SISA. There are no clauses under the Deed which allow for the release or withdrawal of benefits at any time and for non-retirement purposes. The Fund therefore meets the definition of superannuation fund.

In addition, it is clear that the Fund is established outside of Australia with its central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers any proposed lump sum payment from this Fund to be received by Your Client, as a payment from a foreign superannuation fund as defined in subsection 995-1(1).