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Edited version of your written advice
Authorisation Number: 1051342072163
Date of advice: 23 February 2018
Ruling
Subject: Lump sum transfer from a foreign superannuation fund
Question 1
For the purpose of sections 305-60 and 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) is Your Client’s Overseas Fund (the Overseas Fund) a foreign superannuation fund?
Answer
No
Question 2
Will the proposed lump sum payment from the Overseas Fund, be subject to the tax free treatment referred to in section 305-60 of the ITAA 1997?
Answer
No
This ruling applies for the following period:
Income year ending 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
Your Client arrived in Australia on during the 2009-10 income year on a ‘Skilled – Regional Sponsored Visa (Subclass) 475’ before obtaining permanent resident status.
During the 2016-17 income year Your Client became an Australian citizen.
Subsequent to becoming an Australian citizen Your Client commenced action to cancel their overseas citizenship.
Your Client holds an interest in the Overseas Fund, a pension scheme in an Overseas country.
You have supplied correspondence from the Overseas Fund which provides the conditions of withdrawal from the Overseas Fund and states member contributions go into several accounts.
The accounts can be used for:
● buying a home, pay for insurance, investment and education. The education expenses can be in relation to the member or the members’ spouse, children, siblings’ or relatives.
● old age and investment in retirement-related financial products.
● personal or immediate family hospitalisation expenses and approved medical insurance.
Your Client plans to withdraw their benefits in the Overseas Fund in the future.
Your Client has provided documentation as to why the benefits in the Overseas Fund were not withdrawn in earlier years.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 295-95(2)
Income Tax Assessment Act 1997 subdivision 305-B
Income Tax Assessment Act 1997 section 305-60
Income Tax Assessment Act 1997 section 305-70
Income Tax Assessment Act 1997 subsection 995-1(1)
Superannuation Industry (Supervision) Act 1993 section 10
Superannuation Industry (Supervision) Act 1993 section 62
Reasons for decision
Lump sum payments from foreign superannuation funds:
Subdivision 305-B of the ITAA 1997 details the tax treatment of superannuation lump sum benefits from foreign superannuation funds.
Section 305-60 of the ITAA 1997, which relates to lump sums received within six months after Australian residency, states:
A superannuation lump sum you receive form a foreign superannuation fund is not assessable income and is not exempt income if:
(a) you receive it within 6 months after you became an Australian resident; and
(b) it relates only to a period:
(i) when you were not an Australian resident; or
(i) starting after you became an Australian resident and ending before you receive the payment; and
(c) it does not exceed the amount in the fund that was vested in you when you received the payment.
Note: If you received the lump sum after that period of 6 months, or the lump sum exceeds the vested amount, the payment will fall within section 305-70.
Further to the above, it should also be noted that there is no provision or discretion in section 305-60 of the ITAA 1997 to treat a lump sum from a foreign superannuation fund as non assessable or exempt income if it is received outside of the six month period.
As shown above, one of the main issues for consideration as to whether sections 305-60 or 305-70 of the ITAA 1997 can apply is whether the lump sum received is from 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 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.
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 …
(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.
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. The fact that some of its members may be Australian residents would not necessarily alter this.
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:
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 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:
● 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).
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 Overseas Fund also provides benefits for purposes such as:
● to pay medical costs incurred by the member, including medical insurance and hospitalisation expenses; and
● education expenses in relation the member or the members’ spouse, children, siblings’ or relatives.
Because the benefits in the Overseas Fund are also paid for other than retirement purposes, the Overseas Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.
Accordingly, the Overseas Fund does not fall within the definition of a foreign superannuation fund. Hence neither sections 305-60 or 305-70 of the ITAA 1997 will apply in relation to Your Client’s intended withdrawal of benefits from the Overseas Fund.