Edited version of private advice

Authorisation Number: 1051579461161

Date of advice: 17 January 2020

Ruling

Subject: Foreign superannuation funds and 99B

Question

Does Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a rollover from Plan 1 to your Plan 2")?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You are an Australian resident for tax purposes.

In XXXX, your parent, passed away.

Your parent had an interest in a plan 1 and named you as a beneficiary.

There were options to name others such as their estate however you were chosen specifically.

The Plan 1 allows members to withdraw funds at any time for any purpose, including non-retirement purposes.

If a member of the Plan 1 decides to withdraw their benefits before the age of 59½, they will incur a penalty in the form of an additional 10% early withdrawal tax on the amount withdrawn.

You have to transfer the accounts to your name before you can choose what to do with the funds.

You will roll over the interest in the Plan 1 to a Plan 2.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 305-55

Income Tax Assessment Act 1997 subsection 305-55(1)

Income Tax Assessment Act 1997 subsection 305-55(2)

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

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

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.

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 *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 ...

                          (c)        at that time either the fund had no member covered by subsection (3) (an activemember) or at least 50% of:

                                      i.        the total *market value of the fund's assets attributable to *superannuation interests held by active members; or

                                     ii.        the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

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. The fact that some of its members may be Australian residents would not necessarily alter this.

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 Superannuation Industry (Supervision) Act 1993 (SISA), that is:

(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.

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 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 section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the purposes of providing benefits to a member when the events occur:

                          (a)        on or after retirement from gainful employment; or

                          (b)        attaining a prescribed age; and

                          (c)        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 (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 situation is it clear that the Plan 1 was established outside Australia and that their central management and control are outside of Australia.

In addition to providing members benefits on retirement, invalidity or death, the Plan 1 allows their members to withdraw their funds at any time before retirement age for non-retirement purposes.

As a result, the Plan 1 does not meet the definition of a 'foreign superannuation fund' under subsection 995-1(1) of the ITAA 1997.

Application of Subdivision 305-B

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

Section 305-55 of the ITAA 1997, which deals with 'Restrictions to lump sums received from certain foreign superannuation funds' states:

This Subdivision applies if:

                          (a)        you receive a superannuation lump sum from a foreign superannuation fund; and

                          (b)        the fund is an entity mentioned in item 4 of the table in subsection 295-490(1) (which deals with deductions for superannuation entities).

(2)  This Subdivision also applies if you receive a payment, other than a pension payment, from a scheme for the payment of benefits in the nature of superannuation upon retirement or death that:

a.    is not, and never has been, an Australian superannuation fund or a foreign superannuation fund; and

b.    was not established in Australia; and

c.    is not centrally managed or controlled in Australia.

(3)  This Subdivision applies to a payment mentioned in subsection (2) from a scheme mentioned in that subsection in the same way as it applies to a superannuation lump sum from a foreign superannuation fund.

In the context of the Plan 1, subsection 305-55(1) of the ITAA 1997 does not apply as Plan 1 is not considered to be a foreign superannuation fund.

Subsection 305-55(2) of the ITAA 1997 also does not apply to the Plan 1 because it is not considered to be a scheme for the payment of benefits in the nature of superannuation upon retirement or death. This is because the Plan 1 Plan allows for withdrawals before retirement age for any purpose, including non-retirement purposes.

Consequently, Subdivision 305-B of the ITAA 1997 does not apply to a rollover from your Plan 1 to your Plan 2.

Following from the decision which was made by the AAT in Baker's case (i.e. Baker v FCT [2015] AATA 469), a Plan 2 is not considered to be a 'foreign superannuation fund'. This is because as a Plan 2 allows for money to be withdrawn at any time prior to any retirement event, it does not meet the definition of a 'foreign superannuation fund' under subsection 995-1(1) of the ITAA 1997.

The flexibility of money withdrawals from a Plan 2 is such that payments in the nature of superannuation payments from it are but one of a number of possibilities which means that the scheme does not qualify as one for the payment of benefits in the nature of superannuation upon retirement or death within the meaning of s 305-55(2).

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.

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.

The inherited money from your parents Plan 1 account will be rolled over into your Plan 2 fund.

The roll over from the Plan 1 account to the Plan 2 account will not result in any taxation liability in Australia to you.

General Guidance

If in the future you decide to withdraw amounts from your Plan 2 there will be a taxation liability

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.

The whole amount of the earnings is assessable in Australia not just the earnings that accrued from when you became a resident of Australia for taxation purposes.

This is consistent with the Commissioner's view in ATO ID 2011/93.

The earnings must be included in your Australian tax return in the year you withdraw the lump sum amount from the fund.