Edited version of your written advice
Authorisation Number: 1051417626335
Date of advice: 12 April 2019
Ruling
Subject: Lump sum payment from a foreign superannuation fund
Question 1
Does the fund meet the definition of a foreign superannuation fund for the purposes of section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
Question 2
Is any part of the lump sum benefit applicable fund earnings under section 305-70 of the ITAA 1997?
Answer
No.
This ruling applies for the following period:
1 July 2018 to 30 June 2019
Relevant facts and circumstances
You are currently a tax resident of Country A.
You intend to return permanently to Australia in the near future.
When you retire from employment your benefits in the Fund will be paid to you as a lump sum. You will be an Australian tax resident at this time.
The Fund is an exempted Occupational Retirement Scheme (ORS) as per the Occupational Retirement Scheme Ordinance (ORSO).
In accordance with the ORSO legislation (Cap.426) an ORS is an employer scheme that provides employee member benefits on:
The governing rules of the Fund provide that the whole of a member’s balance may be paid on the date of cessation of membership in relation to normal retirement, death, ill health, loss of license or employment transfer.
The rules of the Fund allow a member to withdraw a percentage of their benefits on the termination of employment. For members with 10 or more years of service, 100% of their benefits may be withdrawn from the Fund.
Section 70A of the ORSO (Cap.426) allows an employer who is liable to pay an employee severance payments or long service payments under the Employment Ordinance (Cap. 57), to offset the severance payments or long service payments with the accrued benefits derived from the employer’s contributions made to an ORSO scheme for the employee. This provision also allows an employee to make an application to the administrator for these payments where an employer fails to make the payment.
Guideline V.4 of the Mandatory Provident Fund (MPF) Schemes Authority, states that:
The benefits accrued in respect of an existing member (employees who joined an ORSO scheme on or before 1 December 2000) under an MPF exempted ORSO registered scheme will not be subject to the above preservation, portability and withdrawal requirements. That means the existing member’s benefits accrued under the ORSO scheme will be calculated based on the governing rules of the scheme and can be withdrawn upon the occurrence of the conditions specified under the governing rules, e.g. upon retirement, termination of service, death or disability.
Reasons for decision
Detailed reasoning
Foreign superannuation fund
Section 305-70 of the ITAA 1997 provides that where you receive a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, you include the 'applicable fund earnings' of the lump sum (if any) in your assessable income. Applicable fund earnings are worked out under section 305-75 of the ITAA 1997.
If the entity making the lump sum payment is not a foreign superannuation fund then section 305-70 of the ITAA 1997 will not have any application.
A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as being a fund that is not an Australian superannuation fund. A superannuation fund has the meaning given by subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (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).
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.
Country A exempted Occupational Retirement Schemes allow an existing member to withdraw a percentage of their benefits on the termination of employment. For members with 10 or more years of service, 100% of their benefits may be withdrawn from your Fund.
Furthermore, the ORSO allows an employer who is liable to pay an employee severance payments or long service payments under the Employment Ordinance, to offset the severance payments or long service payments with the accrued benefits derived from the employer’s contributions made to an ORSO scheme for the employee. An employee can also make an application to the administrator for these payments where an employer fails to make the payment.
A Country A ORS satisfies some of the requirements of a foreign superannuation fund, however an ORS 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, an ORS provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.
Accordingly, any payments from the Fund will not be a payment from a foreign superannuation fund and section 305-70 of the ITAA 1997 will not have any application in this instance.
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 Income Tax Assessment Act 1936 (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. This amount will be deemed income at the time of the withdrawal.
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 is not to 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 contributed 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 fund are only assessable in Australia on withdrawal from the fund.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 305-70
Income Tax Assessment Act 1997 section 307-75
Income Tax Assessment Act 1997 section 995-1
Income Tax Assessment Act 1936 section 97
Income Tax Assessment Act 1936 section 99B
Superannuation Industry (Supervision) Act 1993 subsection 10(1)
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
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