Edited version of private advice

Authorisation Number: 1051531464400

Date of advice: 17 June 2019

Ruling

Subject: Foreign lump sum - assessability in Australia

Question 1

Does section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the lump sum payment received by your client from the foreign fund?

Answer

No

Question 2

Will any part of a lump sum payment paid to you from the foreign fund be included in your assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You client is an Australian resident.

Your client was a member of a Country X based fund.

Your client received a lump sum from the Fund in the 20XX-XX income year.

You state this amount is exempt from tax in the Country X

The lump sum received from the Fund represents your client's entire interest in the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1936 section 305-70

Income Tax Assessment Act 1936 section 305-55

Income Tax Assessment Act 1936 section 305-60

Income Tax Assessment Act 1936 section 305-65

Income Tax Assessment Act 1936 subsection 295-95(2)

Income Tax Assessment Act 1936 subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 section 10

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 section 99(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 paragraph 99B(2)(a)

Reasons for decision

Summary

The lump sum payment received by your client is not considered to be a payment from a foreign 'superannuation' fund and section 305-70 of the ITAA 1997 has no application in this case.

Your lump sum will be assessed under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

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

Section 305-55 of the ITAA 1997 restricts the application of the subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax free. It is not assessable income and is not exempt income (sections 305-60 and 305-65 of the ITAA 1997).

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency or termination of foreign employment, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income.

Before determining whether an amount is exempt under sections 305-60 or 305-65 of the ITAA 1997, or assessable under section 305-70, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund, then Subdivision 305-B will not have any application.

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.

However, part of the definition of a foreign superannuation fund also requires consideration of what constitutes a superannuation or retirement fund.

Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), which requires that the fund is a provident, benefit, superannuation or retirement fund.

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.

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 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, in order for the lump sum payment from the overseas fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2). This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above.

Based on the rules of the fund, the Fund does not meet the definition of 'superannuation fund'.

As the payment received by your client was not from a foreign superannuation fund, there are no tax implications under Subdivision 305-B of ITAA 1997 in this case.

Receipt of foreign lump sum

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

Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary.

However, subsection 99B(2) of the ITAA 1936 operates to exclude certain amounts from the assessable income of the beneficiary.

Specifically, paragraph 99B(2)(a) of the ITAA 1936 provides that assessable income will not include the corpus (capital) of the trust - but not an amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer.

In your case, the conditions in subsection 99B(1) of the ITAA 1936 will be satisfied as you will receive an amount of trust property during an income year in which you are a resident.

However, the receipt of an amount that represents amounts previously deposited to the Fund by or on your behalf, would come within paragraph 99B(2)(a) of the ITAA 1936; that is, the amount would be considered to represent the corpus of the trust.

Distributions, to the extent that they come within subsection 99B(2) of the ITAA 1936, are excluded from amounts assessable under subsection 99B(1) of the ITAA 1936.

Only the income accumulated in the Fund paid to you as a resident taxpayer that is normally taxable in Australia and had not previously been subject to tax in Australia will be included in your assessable income.

Therefore, it is the gross amount you will receive converted to Australian dollars, less the amount that represents deposits to the fund converted to Australian dollars, that will be the amount assessable under subsection 99B(1) of the ITAA 1936.