Edited version of private advice

Authorisation Number: 1051594991220

Date of advice: 8 November 2019

Ruling

Subject: Lump sum transfer from a foreign superannuation fund

Question

Is any part of the benefit to be received by your client from an overseas pension scheme (the Overseas Fund) assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question

Will any part of the payment withdrawn from the Overseas Fund be included in your client's assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question

Will your client be treated as a non-Australian tax resident for the period?

Answer

Decline to Rule

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Your client lived and worked in an overseas country for approximately 1 year.

Your client held an interest in a pension scheme (the Overseas Fund) in the overseas country. The Overseas Fund is a complying scheme which was established and is administered in the overseas country.

The document titled 'Summary Plan Description ... Savings and Investment Plan' provides details on withdrawals from the Overseas Fund and states, at page 22:

While you are employed by the Company, you may withdraw amounts from your Account under the circumstances described below:

...

- Tuition, related education fees, and room and board expenses, for the next twelve months of post-secondary education for you, your spouse, your children, your dependents... or your primary beneficiary;

...

- Legal expenses owed (or incurred within past 90 days) by you;

...

- Surgical expenses or emergency medical care/prescriptions for your pets;

In 2018, your client's benefits in the Overseas Fund were withdrawn in cash and transferred to your client's Australian bank account.

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 1997 subsection 295-95(2)

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1936 section 97

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

Income Tax Assessment Act 1936 subsection 99B

Income Tax Assessment Act 1997 Section 307-15

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

Question 1

Summary

The Overseas Fund does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance.

Detailed reasoning

Lump sum payments from foreign superannuation funds:

If a person receives 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 theITAA 1997 will operate to include the applicable fund earnings in the person's assessable income.

The applicable fund earnings are the amount worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

However, before determining whether an amount is assessable under subsection 305-70(2) of the ITAA 1997, 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 subsection 305-70(2) will not have any application.

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 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) 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.

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Subsection 10(1) of the SISA provides that:

superannuation fund means:

(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:

·        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 (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 case, information available indicates that as well as providing benefits on retirement, invalidity and death, the Overseas Fund also allows for withdrawals prior to retirement, as well as borrowing from the fund for purposes such as paying for educational expenses, paying for legal expenses, or paying for the medical care of a pet.

Because the benefits in the Overseas Fund are also paid for other than retirement purposes, the Overseas Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

Accordingly, the Overseas Fund does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance.

Question 2

Any part of the payment that represents earnings on the corpus of the trust will be included in your client's assessable income under section 97 and subsection 99B(1) of the ITAA 1936.

The portion of the funds that represents the corpus of the trust, that is contributions made by your client or their employer, will not be included in the taxpayer's assessable income.

Detailed reasoning

Before we can consider the tax consequences of proceeds from the account, we must first consider whether it is considered a foreign trust or a foreign superannuation fund. It has been determined previously that the Overseas Fund is not a superannuation fund for the purposes of the ITAA 1997.

Therefore, as an Australian resident, your client will be subject to the general tax rules applicable to their circumstances, in this case the general tax rules relating to trust income.

Assessability of trust income

Section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, a person's assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to sections 97 and 99B of the ITAA 1936.

Section 97 of the ITAA 1936 includes in a person's assessable income distributions of income made by a trust to the person as a beneficiary.

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, the 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))

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

·        amounts previously included in the beneficiary's income under section 97 (paragraph 99B(2)(c)).

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)).

Income derived while beneficiary was a non-resident

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.

Application to circumstances

In this case, your client has withdrawn the funds from the Overseas Fund. The Overseas Fund was holding and investing contributions for your client's benefit; we therefore consider it took on the form of a trust.

Any part of the withdrawal that represents amounts deposited by your client or their employer will not be included in your client's assessable income in accordance with subsection 99B(2) of the ITAA 1936. These amounts are considered the corpus of the trust.

However, any part of the withdrawal that represents income derived by the Overseas Fund on the corpus of the trust during the financial year the withdrawal is made will be included in your client's assessable income under section 97 of the ITAA 1936.

Any part of the withdrawal that represents earnings on the corpus of the trust prior to the period listed above will be assessed under subsection 99B(1) of the ITAA 1936.

Additional information

Note that a foreign income tax offset may be available to your client in relation to any foreign tax paid on the income assessed in Australia. For more information, search for Quick Code QC 48121 at www.ato.gov.au.

Question 3

Under certain circumstances the Commissioner may decline to make a private ruling. In your case, in relation to your client's tax residency status for the nominated period, the Commissioner will decline to rule because the provision of a private ruling would not have any practical consequences for you.

As discussed above in Question 1 and Question 2, no part of the benefit transferred from your client's Overseas Fund will be assessable as applicable fund earnings. Rather, the amount will be assessed as income from a foreign trust. Therefore, it is not necessary to consider your client's residency status.