Edited version of your written advice

Authorisation Number: 1051428453677

Date of advice: 12 September 2018

Ruling

Subject: Foreign employment income and contributory provident fund income

Question 1

Is the foreign employment income exempt from tax in Australia?

Answer

No

Question 2

Is the Contributory Provident Fund (PF) payment assessable income?

Answer

Yes

Question 3

If the PF payment is assessable, will the payment be assessed as a superannuation lump sum payment?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

● You are a resident of Australia for income tax purposes.

● You were offered and accepted an appointment with an overseas company as a Programme Officer.

● You were employed from early 2015 to mid-2016.

● Your employer made contributions into a provident fund on your behalf.

● The provident fund was established on early 2015.

● Your role involved:

● Assist in the planning and organization of activities of conferences, meetings and workshops relating to telecommunications and ICT designated by the Secretary General;

● Preparation of documents and presentations for the conferences, meetings and workshops;

● Participate in conferences, meetings and workshops, including taking minutes of the discussions and delivering presentations, as required;

● Follow-up and keep abreast on the discussions and developments on the relevant work programs and report to the supervisors as necessary; and

● Perform such other related duties as may be assigned by the Secretary General.

● You received a salary and allowances. A list of allowances was provided.

● The work was performed overseas

● Benefits are to be paid upon your retirement, death or when an employee leaves the employer.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 6-15(2)

Income Tax Assessment Act 1997 section 6-20(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 295-95(2)

Income Tax Assessment Act 1997 subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Detailed reasoning for questions 1 and 2

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived from all sources, whether in or out of Australia, during the income year.

However, subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable.

Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt by a provision of the ITAA 1997 or another Commonwealth law.

The International Organisations (Privileges and Immunities) Act 1963 (IO(P&I)A) is a Commonwealth law under which an international organisation, and persons engaged by it, may be accorded certain privileges and immunities including an exemption from tax.

Taxation Ruling TR 92/14 discusses taxation privileges and immunities of prescribed international organisations and their staff.

Paragraph 2 of Part 1 of the Fourth Schedule of the IO(P&I)A provides for an exemption from taxation on salaries and emoluments received from an international organisation by an officer (other than high officer) of the organisation (paragraph 9 of TR 92/14).

Taxation Determination TD 92/153 provides information as to who is a 'person who holds an office'. The determination states that the Department of Foreign Affairs and Trade (DFAT), who administers the IO(P&I)A and regulations, considers that the phrase 'person who holds an office' covers those people who work as employees of the organisation.

In your case, you were engaged as an employee and a 'person who holds an office'. However, TR92/14 explains that ‘Persons engaged by an International Organisation may be accorded privileges and immunities in the nature of exemption from taxation as described in the Second, Third, Fourth and Fifth Schedules to the IO(P+I)A. Tax exemptions may be available to a High Officer, Representative, Officer, or expert or consultant. As with the organisation itself, it is necessary to examine the regulations of the particular International Organisation to ascertain to what taxation exemptions, if any, a person may be entitled.’

In the case of your employer regulations, the regulations do not mention the tax treatment of employees, therefore, employees are not covered by an exemption.

Consequently, the income you derived from your employment contracts is not exempt from income tax in Australia under the IO(P&I)A, and is therefore assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Detailed reasoning for question 3

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.

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1

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 …

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1

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.

‘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.

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 accordance with section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for one or more of the 'core purposes'; or one or more of the ‘core purposes’ and one or more of the ‘ancillary purpose’, namely for the provision of benefits to a member on or after:

● retirement from gainful employment; or

● attaining a prescribed age; or

● the member's death (this may require the benefits being passed on to a member's dependents or legal representative); or

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

● the member’s cessation of work for gain or reward on account of ill-health.

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 the Provident fund provides benefits at retirement, death or when an employee leaves the employer. Because the benefits in the Fund are also paid for other than retirement purposes, example; on separation from the organization, the Provident Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

As the Pension Fund is not a ‘superannuation fund’, it cannot be a ‘foreign superannuation fund’. The payment cannot be treated as a superannuation lump sum payment.