Edited version of private advice

Authorisation Number: 1051590044060

Date of advice: 22 October 2019

Ruling

Subject: Foreign lump sums

Question 1

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

Answer

No.

Question 2

Are the payments and income to be received by the taxpayer from the retirement plans assessable income?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The taxpayer is an overseas citizen and arrived in Australia in the 2019-20 income year.

The taxpayer holds accounts with several retirement plans (the Plans) and intends to withdraw lump sums from these accounts. The total value of the taxpayer's benefits in the Plans is provided.

The Plans allow for access to benefits prior to retirement age for any purpose.

The benefits from the Plans will not be transferred to an Australian superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 section 102AAM

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 295-95.

Income Tax Assessment Act 1997 section 305-70.

Income Tax Assessment Act 1997 section 770-10.

Income Tax Assessment Act 1997 section 770-70.

Income Tax Assessment Act 1997 section 995-1.

Superannuation Industry (Supervision) Act 1993 section 10.

Superannuation Industry (Supervision) Act 1993 section 19.

Superannuation Industry (Supervision) Act 1993 section 62.

Taxation Administration Act 1953 section8AAD

Reasons for decision

Summary

None of the Plans held by the taxpayer will satisfy the meaning of a 'superannuation fund' under subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SISA). Accordingly, none of the Plans can be considered a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Any payments from the Plans will be assessable income to the extent that it is growth in the Plans. The assessable amount excludes any contributions made by the taxpayer or their employers to the Plans but does include any growth in the Plans before the taxpayer became an Australian resident for taxation purposes.

The assessable amount will also be subject to an interest charge.

Income tax withheld by the overseas revenue authorities can be claimed as a Foreign Income Tax Offset subject to certain limitations.

Detailed Reasoning

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.

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.

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) 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 active member) 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.

Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), 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;

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) 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 Commissioner of Taxation (Cth) (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 section 62 of the SIS SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the following 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).

Though section 62 of the SISA also allows a superannuation fund to provide benefits for 'ancillary purposes', such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses et cetera.

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 its 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 SIS 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 education and medical expenses.

It is noted that the Plans satisfy some of the requirements of a foreign superannuation fund such as being established and operated outside Australia and having the central management and control outside of Australia. However, none of the Plans are exclusively a provident, benefit or superannuation fund because they do not provide benefits for the specific future purposes of the individual's retirement. Members of the Plans can withdraw their benefits at any time without a requirement to meet a condition of release. In other words, the Plans provide for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

Accordingly, none of the Plans will fall within the definition of a foreign superannuation fund. Consequently, subdivision 305-B of the ITAA 1997 will not apply to any lump sum payments made to the taxpayer from the Plans.

Assessable income

The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) ITAA 1997).

Any withdrawals made by the taxpayer from the Plans will not be ordinary income (subsection 6-5(2) of the ITAA 1997).

'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with receipt of trust income not previously subject to tax.

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

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 under subsection (1) is not to include any amount that represents either:

·         the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)

·         amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and

·         amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936).

Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).

ATO ID 2011/93 considers the tax implications when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income. It states that:

The trust property paid to the resident beneficiary is attributable to foreign source interest derived by the trust. As interest income would have been assessable had it been derived by a resident taxpayer, and as the interest income has not been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, none of the exclusions in subsection 99B(2) of the ITAA 1936 applies to reduce the amount included in the assessable income of the beneficiary.

A question arises however whether the non-resident status of the beneficiary for the period in which the interest was derived by the trust estate in any way alters the outcome under the provision.

It is clear from the language of section 99B of the ITAA 1936 ... that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust. Rather, the only explicit condition concerning residency is that the beneficiary be a resident at some time during the year of income in which the trust property is paid to them or applied for their benefit.

In this case, as any withdrawn amounts will be similar to a distribution from a trust. Any amounts distributed (withdrawn) or credited from the Plans will be assessable under subsection 99B(1) of the ITAA 1936.

Any part of the distribution from the Plans that represent amounts deposited by the taxpayer will not be included in the taxpayer's assessable income in accordance with subsection 99B(2) of the ITAA 1936. These amounts are considered the corpus of the trust.

Any part of the withdrawal that represent earnings on the corpus of the trust will be assessed under subsection 99B(1) of the ITAA 1936, subject to the exclusions under subsection 99B(2) of the ITAA 1936.

Interest charge on distributions of accumulated trust income

An Australian resident may be liable to interest under the Taxation (Interest on Non-resident Trust Distributions) Act 1990, where their assessable income includes an amount from non-resident trust assessed under section 99B of the ITAA 1936.

Subsection 102AAM(1) of the ITAA 1936 may make a taxpayer liable to pay interest to the Commissioner, on distributions from certain non-resident trust estates.

The interest is calculated on the following amount:

(distributed amount × applicable rate of tax) - FTC

·         "Distributed amount" is the amount included in assessable income of the taxpayer under section 99B of the ITAA 1936 and grossed up by any foreign tax in respect of the distribution.

·         "Applicable rate of tax" is maximum rate of tax payable by the taxpayer.

·         "FTC" is the foreign tax credit which is attributable to the amount of the distribution included in the taxpayer's assessable income.

The rate of interest is the GIC rate fixed under Section 8AAD of the Taxation Administration Act 1953 less seven percentage points.

Foreign income tax offset (FITO)

A foreign income tax offset is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.

Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

When claiming a FITO, you are required to gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income.

The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997).

The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source.

If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap.

In this case, the taxpayer will be entitled to FITO for any income tax withheld from the income in the Plans limited to the amount to which the taxpayer is entitled under section 770-10 of the ITAA 1997.