Edited version of your written advice

Authorisation Number: 1051348309767

Date of advice: 9 March 2018

Ruling

Subject: Lump sum transfer from a foreign superannuation fund

Question 1

Is any part of the benefit to be received by your client from their three foreign pension schemes assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Will any part of a lump sum payment paid to your client from their foreign retirement savings plans be treated as assessable income under section 99B of the Income Tax Assessment Act 1936?

Answer 2

Yes.

Question 3

Will the taxpayer be entitled to a foreign income tax offset in respect of any foreign tax withheld on funds withdrawn from the accounts?

Answer 3

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your client is an Australian resident and citizen of a foreign country, and holds an interest in three pension schemes in the foreign country (collectively, the Foreign Funds):

(a) (Foreign Fund 1).

(b) (Foreign Fund 2).

(c) (Foreign Fund 3). Your client shares this account with their partner.

In relation to Foreign Fund 1 and Foreign Fund 2, the document you provided gives details on withdrawals from the funds and states:

Withdrawals are subject to ordinary income tax. An additional 10% penalty may apply to withdrawals made prior to age 59½.

The other document you provided gives the conditions of withdrawal from the Foreign Fund and allows for in-service withdrawals and hardship withdrawals.

Another document provides the definition of ‘immediate and heavy financial needs.’

In relation to Foreign Fund 3, the web page titled ‘Borrowing or withdrawing money from your … plan’ states:

Your … plan may have a provision that allows you to withdraw money from the plan while you're still employed if you can demonstrate "heavy and immediate" financial need and you have no other resources you can use to meet that need (e.g., you can't borrow from a commercial lender or from a retirement account and you have no other available savings). It's up to your employer to determine which financial needs qualify. Many employers allow hardship withdrawals only for the following reasons:

● To pay the medical expenses of you, your partner, your children, your other dependents, or your plan beneficiary

● To pay the burial or funeral expenses of your parent, your partner, your children, your other dependents, or your plan beneficiary

● To pay a maximum of 12 months worth of tuition and related educational expenses for post-secondary education for you, your partner, your children, your other dependents, or your plan beneficiary

● To pay costs related to the purchase of your principal residence

● To make payments to prevent eviction from or foreclosure on your principal residence

● To pay expenses for the repair of damage to your principal residence after certain casualty losses

Your client intends to transfer their benefits from the Foreign Funds to their Australian complying superannuation fund or bank account during the 20XX-XX income year. At the end of 20XX, your client’s benefits in the Foreign Funds were certain figures.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6-10(2)

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

Income Tax Assessment Act 1997 section 10-5

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)

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1936 subsection 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 subsection 481(3)

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Summary

The Foreign Funds do not fall within the definition of foreign superannuation funds and subsection 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) will not have any application in this instance.

Detailed reasoning

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.

The applicable fund earnings are the amount worked out under either subsection 305-75(2) or 305-75(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 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) 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.

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:

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 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 three Foreign Funds also provide benefits for purposes such as:

● to pay medical costs incurred by the Participant, their partner, their children, their dependents or the Beneficiary under the Foreign Fund Agreement;

● to purchase the Participants’ principal residence;

● to pay for the higher educational expenses of the Participant, their partner, their children, their dependents or the Beneficiary under the Foreign Fund Agreement; or

● to pay expenses for the repair of damage to the Participants’ principal residence.

Because the benefits in the Foreign Funds are also paid for other than retirement purposes, the Foreign Funds do not meet the 'sole purpose test' and therefore cannot be considered 'superannuation funds' for Australian income tax purposes.

Accordingly, the Foreign Funds do not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance.

Question 2

Assessable income

The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)).

Your clients withdrawal from the Foreign Funds would not be ordinary income (subsection 6-5(2) of the ITAA 1997).

‘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).

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

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.

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 ITAA1936).

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).

In your clients case, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from the Foreign Funds are assessable under subsection 99B(1) of the ITAA 1936.

Any distribution from the Foreign Funds is assessable in your clients hands subject to the exclusions under subsection 99B(2) of the ITAA 1936.

Question 3

Foreign income tax offset (FITO)

A foreign income tax offset is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.

Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

When claiming a FITO, your clients are required to gross up their income for the foreign tax paid (or which is taken to have been paid) in respect of that income.

The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997).

The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source.

If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap.

In your client’s case, they are entitled to FITO for the income tax withheld from their income in the foreign country limited to the amount to which they are entitled under section 770-10 of the ITAA 1997.