Edited version of your written advice

Authorisation Number: 1051425713767

Date of advice: 2 November 2018

Ruling

Subject: Applicable fund earnings

Question 1

For the purposes of sections 305-60 and 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997), is your client’s Overseas Fund considered to be a foreign superannuation fund?

Answer

No

Question 2

Is any part of the lump sum payment included in your assessable income?

Answer

Yes.

Question 3

Are you entitled to a foreign income tax offset for any income tax paid by the Overseas Fund in respect of the lump sum?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2018

Income year ending 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

● The Taxpayer migrated to Australia and became a permanent resident since this date.

● The taxpayer has remained in Australia since migrating.

● Before moving to Australia, the Taxpayer has worked in a number of different countries.

● The Taxpayer retired from full-time work.

● The Taxpayer has not made any contributions or transfers to the Overseas Fund.

● The balance only increased as a result of growth in the fund.

● You provided, via email, a copy of a summary of the withdrawal options which are provided to members under the Overseas Fund.

● You provided, via email, a copy of the plan rules in relation to the withdrawal options provided to members under the Overseas Fund. These rules state that one or more of these withdrawal options allow for the withdrawal of benefits before retirement age for non-retirement related purposes such as for the payment of medical and educational expenses and the purchase and repairs on a home.

Relevant legislative provisions

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

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

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

Income Tax Assessment Act 1936 Section 23AK

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 Subsection 160AF(1)

Income Tax Assessment Act 1936 Section 160AFE

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 1936 Subsection 481(1)

Income Tax Assessment Act 1997 Section 770-5(1).

Income Tax Assessment Act 1997 Subsection 770-10(1).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

Question 1

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

(ii) 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.

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.

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 your client’s situation, the information indicates that in addition to providing benefits on retirement, invalidity and death, the Overseas Fund also allows for the withdrawal of benefits, for non-retirement related purposes such as paying for medical and educational expenses and purchasing and conducting repairs on a home.

As the Overseas Fund allows for the withdrawal of benefits before retirement age for purposes other than retirement, this 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 fund.

Question 2

Summary

Any part of the lump sum payment distributed or credited from the Overseas Fund is assessable under subsection 99B(1) of the ITAA 1936.

Detailed reasoning

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)).

The withdrawal from the Taxpayer’s Overseas Fund account 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 this case, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from the Overseas Fund are assessable under subsection 99B(1) of the ITAA 1936.

Any distribution from the retirement savings plan is assessable in the Taxpayer’s hands subject to the exclusions under subsection 99B(2) of the ITAA 1936.

Question 3

Summary

The Taxpayer is entitled to a foreign income tax offset for the income tax withheld from their income in the Overseas Fund, limited to the amount that they are entitled to under section 770-10 of the ITAA 1997.

Detailed reasoning

Foreign tax credits - 2008 and earlier income years

For the 2008 and earlier income years, subsection 160AF(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of:

● the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or

● the amount of Australian tax payable in respect of the foreign income.

Where the foreign tax paid is greater than the Australian tax payable, a taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess foreign tax paid.

However under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any tax payable on foreign income earned in the future.

Foreign income tax offset (FITO) - from 1 July 2008

From 1 July 2008 the foreign tax credit system was replaced by the foreign income tax offset system.

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, the Taxpayer will be 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 this case, the Taxpayer will be entitled to FITO for the income tax withheld from their income in the Overseas Fund limited to the amount to which they are entitled under section 770-10 of the ITAA 1997.