Edited version of your written advice

Authorisation Number: 1051496614928

Date of advice: 10 May 2019

Ruling

Subject: Transfer from foreign trust

Question 1

Do the Transferor Trust provisions apply to the foreign trust?

Answer

No

Question 2

Will section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the withdrawal of funds from the foreign trust?

Answer

Yes

Question 3

If the answer to Question 2 is ‘Yes’, will specific contributions to the foreign trust form part of the corpus of the foreign trust?

Answer

Yes, see our response below.

Question 4

Will the payment from the foreign trust be considered a payment from a ‘foreign superannuation fund’ for the purposes of Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 5

Will the payment from the foreign trust be considered an eligible termination payment?

Answer

No

This ruling applies for the following period:

1 January 2014 to 30 June 2014

1 July 2015 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

The scheme commences on:

1 January 2014

Relevant facts and circumstances

● The Taxpayer was a non-resident for Australian income tax purposes during a period and was an employee of a foreign resident company.

● During the Taxpayer’s employment, the Taxpayer was invited to participate in the Plan.

● The plan is designed to help employees plan for retirement and meet their long-term savings goals.

● The Trustee of the Plan and the employer are both non-residents and located in unlisted countries for Australian foreign entity purposes.

● Whilst employed the Taxpayer would make personal contributions from his post-tax earnings to the Plan. Under the Plan Rules, the employer would match these contributions on a dollar for dollar basis, up to a maximum limit of 5%.

● The Plan only allows participants to withdraw their savings in the following circumstances:

● When the participant retires from working;

● When the participant ceases to be employed by the employer; or

● Special circumstances, including hardship circumstances, or when the employee reaches the age of 59.

● Once a participant ceases to be employed by the employer, they are no longer able to contribute to the plan. However, a participant who is no longer employed has a choice of:

● Withdrawing the funds; or

● Keeping the account invested, although the funds must eventually be withdrawn once the participant reaches the age of 70.

● The Taxpayer has ceased employment with employer and plans to withdraw the balance of the Plan in cash. The funds will not be transferred to an Australian superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 305-60

Income Tax Assessment Act 1997 subsection 305-70

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

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 99B

Superannuation Industry (Supervision) Act 1993 subsection 10(1)

Superannuation Industry (Supervision) Act 1993 section 62

We followed these ATO view documents

Taxation Ruling TR 2003/13: Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase ‘in consequence of’

Case law

Scott v Commissioner of Taxation of the Commonwealth (No.2) (1966) 10 AITR 290; (1966) ALJR 265; (1966) 14 ATD 333

Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519

Reasons for decision

Question 1

Transferor Trust rules

The transferor trust rules do not apply.

Question 2

Section 99B ITAA 1936 and foreign funds

Please see reasoning below at Question 4. Section 99B of the ITAA 1936 will apply.

Question 3

Exclusions from section 99B ITAA 1936

Please see reasoning below at Question 4. The employee and employer co-contributions are excluded under subsection 99B(2) of the ITAA 1936.

Question 4

Lump sum payments from foreign superannuation funds

Under section 305-60 of the ITAA 1997, a lump sum payment from a foreign superannuation fund is non-assessable, non-exempt income if:

(a) you receive it within 6 months after you become an Australian resident; and

(b) it relates only to a period:

(i) when you were not an Australia 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.

Before determining whether section 305-60 of the ITAA 1997 applies, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund.

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.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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.

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the SISA, which requires that the fund is a provident, benefit, superannuation or retirement fund.

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No.2) (1966) 10 AITR 290; (1966) 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 benefits of its employees except that it must be 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’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.

In section 62 of the SISA, a regulated superannuation fund must be ‘maintained solely’ for 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).

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 SIS Regulations) 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.

Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund:

a) can also be used as a savings plan for non-retirement purposes; and/or

b) contains provisions for pre-retirement withdrawals for general non retirement purposes such as housing, education and medical expenses.

It is noted that the Plan satisfies some of the requirements of a foreign superannuation fund as it is established and operated outside Australia and the central management and control is outside of Australia. However, the Plan is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purposes of the individual’s retirement. Members can withdraw benefits prior to retirement age. In other words, the Plan provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

The remaining requirements under section 305-60 of the ITAA 1997 must also be satisfied:

● You received the payment within six months of becoming an Australian resident;

● The payment relates to a period where you were a non-resident; and

● The payment does not exceed the amount that was vested in you when the payment was made.

Accordingly, the Plan does 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.

As a result, any part of the payment that represents earnings on the corpus of the trust will be included in your assessable income under section 97 and subsection 99B(1) of the ITAA 1936.

Receipt of trust income not previously subject to tax in Australia

A fund in the nature of a retirement or investment plan/fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder.

Section 99B of the ITAA 1936 deals with the receipt of trust income ‘not previously subject to tax’ in Australia and applies where an Australian resident taxpayer receives a lump sum payment from a foreign retirement or investment fund. Section 99B takes precedence over section 97 of the ITAA 1936 in assessing these types of payments.

Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust who was a resident at any time during the year of income, the amount is to be included in the assessable income of the beneficiary.

However, 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 does not include any amount that represents the corpus of the trust - but not an amount that is attributable to income of the trust which would have been included in the assessable income of a resident taxpayer if it had been derived by that taxpayer.

Consequently, the assessable amount is the total amount received less any amounts deposited to the fund (the corpus) by the taxpayer, or on their behalf. The rule is that the taxpayer is taxed only on the earnings of the investment on withdrawal, not on the corpus returned to them. Any earnings in the funds are only assessable in Australia on withdrawal from the funds.

Question 5

Employment termination payment

A payment made to an employee is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135.

Subsection 82-130(1) of the ITAA 1997 states:

82-130(1) A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person’s death, in consequence of the termination of the other persons employment; and

(b) it is received no later than 12 months after the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

The phrase in consequence of is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. The Commissioner has also issued Taxation Ruling TR 2003/13 (TR 2003/13) which discusses the meaning of the phrase.

Paragraph 5 of TR 2003/13 states:

the Commissioner considers that a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment follows as an effect or result of the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Paragraphs 7 and 8 of TR 2003/13 are relevant for the current case:

7. The greater the length of time between the termination of employment and the payment, the more likely that the causal connection between the termination and the payment will be too remote for a conclusion that a payment was received in consequence of the termination of employment. However, length of time will not be determinative when there is a presently existing right to payment of the amount at the time of termination. Accordingly, if at the time of termination of employment the taxpayer has the right to commute a pension to a lump sum amount at a later date, the subsequent exercise of that right will be considered to be in consequence of the termination of employment.

8. Where, after the date of termination, a taxpayer obtains the right to commute a pension to a lump sum, the payment resulting from exercising that right would not be one that is received in consequence of the termination of employment. The payment does not ‘follow on as an effect or result of’ the termination. The obtaining of the right to commute is an intervening event which makes the causal link between the termination and payment too remote.

As noted above, the Taxpayer upon termination of their employment will only become entitled to access their retirement savings. The Taxpayer has options available with the Plan as to when and how they withdraw their retirement savings.

The termination of the Taxpayer’s employment only gives them the right to access his retirement savings - it is giving him access to his rights to claim against the Plan. The access to the Plan is not in consequence of his dismissal and is not payable by the employer - the payment does not ‘follow on as an effect or result of’ the termination.