Edited version of your written advice

Authorisation Number: 1051504077697

Date of advice: 23 May 2019

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is the fund a foreign superannuation fund according to the definitions in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Taxpayer is an Australian resident for tax purposes.

The Taxpayer - an Australian (and dual country Y ) citizen lived and worked in the country Y for 28 years, and returned to live in Australia XX XXXX2012. It is considered that the Taxpayer’s Australian tax residency re-commenced on that date. The fund market value was ZZ,XXXX at that date. The taxpayer did not make further contributions to the fund.

When asked to provide details of the country Y Fund, in particular the rules with respect to accessing the funds, the Applicant provided the following details in an email to the ATO dated in mid 2019:

● “A fund is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax- and penalty-free after age 59½ and once the account has been open for five years. With a fund, there are no contribution age restrictions, nor do you have to take Required Minimum Distributions (RMDs).

● A fund is a retirement account that encourages you to save by offering you a tax benefit. Unlike with a traditional fund, your contributions to a fund are not tax-deductible. But those contributions and your investment earnings grow tax-free, meaning there’s no tax on your fund withdrawals in retirement. With a traditional fund, your withdrawals in retirement are taxed as income.

● Like a traditional fund, a fund is an account that holds your investments, rather than an investment itself. You open a fund at a brokerage, then select what you want to invest in, such as mutual funds, stocks, bonds and exchange-traded funds (ETFs).

● In 2019, it allows for contributions of up to $6,000 per year — or $7,000 if you are 50 or older — and you can use it in addition to a XXXX.(Those limits are up from $5,500 and $6,500 in 2018.)

● Because you’ve already paid taxes on your fund contributions, you can withdraw them without tax or penalty at any time. You may, however, be taxed or penalized if you withdraw your investment earnings.

● Once you hit 59½ and have held the account for at least five years, you can take distributions, including earnings, from a fund without paying federal taxes.

● You can use fund money to pay for qualified college expenses without an early distribution penalty, so you can use the account to supplement or as an alternative to a college savings account like a XXX plan. Keep in mind that only the penalty is waived — you may still owe income taxes on early distributions of earnings, even if for qualified college costs.

● The account is not subject to the required minimum distributions typically required from a traditional fund or XXX beginning at age 70½. This means you can use a fund to pass money to your heirs.”

You have withdrawn a lump sum from the fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

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

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1936 section 97

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 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 1997 section 305-75.

Income Tax Assessment Act 1997 section 305-80.

Income Tax Assessment Act 1997 section 307-15.

Income Tax Assessment Act 1997 section 960-50.

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

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision

Lump sum payments from foreign superannuation funds

Subdivision 305-B of the ITAA 1997 deals with the tax treatment of superannuation benefits paid from certain foreign superannuation funds.

In accordance with section 305-60 of the ITAA 1997, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income.

If a person received 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 applies to include the applicable fund earnings (if any) in the person’s assessable income.

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 if not an *Australian superannuation fund at the 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 definitions of asterisked terms, see the Dictionary, starting at section 995-1.

Relevantly, subsection 295-95(2) of the ITAA 1997 defines an ‘Australian superannuation fund’ as follows:

A *superannuation fund is an Australian superannuation fund at a time, and for an 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 Australian; and…

*to find definitions of asterisked terms, see the Dictionary, starting at section 955-1.

Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would not qualify as an Australian superannuation fund and would therefore be a foreign superannuation fund in accordance with subsection 995-1(1) of the ITAA 1997.

Meaning of ‘superannuation fund’

Subsection 995-1(1) of the ITAA 1997 defines a ‘superannuation fund’ as having the same meaning given by section 10 of the SISA, that is:

(a) A fund that:

a. is an indefinitely continuing fund; and

b. 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 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 Mahoney v Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahoney). 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 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 Superannuation Industry (Supervision) Regulations 1994) 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 Mahoney, the Commissioner’s view is that for a fund to be classified as a superannuation fund, it must be 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 as specified under the SISA.

The information provided indicates that the Taxpayer could access their benefits in the Country y Fund for pre-retirement purposes. For example, a member may withdraw their after-tax contributions from their account at any time, for any reason. The applicant has stated that fund money can be used to pay for qualified college expenses without an early distribution penalty.

It is considered that the Country Y Fund does not ultimately provide the narrow range of benefits required by the definition of a superannuation fund.

Further, as the benefits in the Country Y Fund can be access for pre-retirement purposes, the country Y Fund does not meet the ‘sole purpose test’ and therefore cannot be considered a ‘superannuation fund’ for the purposes of subsection 10(1) of the SISA.

Therefore, on the basis of the information provided, any payments made from the Fund will not be considered to be paid from a ‘foreign superannuation fund’ as defined in subsection 995-1(1) of the ITAA 1997.

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 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 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.