Edited version of private advice

Authorisation Number: 1051599816437

Date of advice: 25 October 2019

Ruling

Subject: Foreign superannuation fund

Question

Is the Fund a 'foreign superannuation fund' for the purposes of Section 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997)

Answer

Yes

This ruling applies for the following period:

Financial year ended 30 June 2020

The scheme commences on:

24 October 2007

Relevant facts and circumstances

·        The Fund is a self-investment personal pension scheme, administered by the Trustee.

·        The Trustee is an incorporated company in a foreign country. The Trustee directors are foreign citizens domiciled outside Australia. The Trustee holds its board meetings outside Australia on a permanent basis.

·        The Fund is governed by the rules set out in its Trust Deed (the Trust Deed).

·        The Fund was established as an indefinitely continuing retirement scheme.

·        The Fund was established in a foreign country, and was registered in that foreign country as a non-occupational, investment-regulated pension scheme.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 295-95.

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

Income Tax Assessment Act 1997 paragraph 295-95(2)(a).

Income Tax Assessment Act 1997 paragraph 295-95(2)(b).

Income Tax Assessment Act 1997 paragraph 295-95(2)(c).

Income Tax Assessment Act 1997 subsection 295-95(3).

Income Tax Assessment Act 1997 subsection 295-95(4).

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

Superannuation Industry (Supervision) Act 1993 section 10

Reasons for decision

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, the Trust Deed for the Fund states, at Clause 2. states:

Purpose of Plan

2.3 The sole purpose of the Plan is to provide Relevant Benefits for the Member and the Beneficiaries.

The schedule to the trust deed contains the Plan rules, these rules outline the circumstances in which the trust will pay a pension or lump sum, they include:

·        Benefits on retirement,

·        Incapacity benefits, and

·        Death benefits.

From these sections, it is apparent that the benefits in the Fund are paid purely for retirement purposes. There is no indication that the Fund provides benefits for any other purposes, such as paying for medical costs, purchasing a home, paying for education, or similar.

The Fund meets the 'sole purpose test' and therefore can be considered a 'superannuation fund' for Australian income tax purposes.

'Foreign superannuation fund'

As discussed above, the Fund is a 'superannuation fund' for Australian income tax purposes.

Per subsection 995-1(1) of the ITAA 1997, a superannuation fund is a foreign superannuation fund if it is not an Australian superannuation fund.

In order to be categorised as an Australian superannuation fund, the Fund must meet all three tests set out in subsection 295-95(2) of the ITAA 1997. If it does not meet all three tests, it cannot be an Australian superannuation fund and will instead be a foreign superannuation fund.

Test One - Fund established in Australia or any asset of the fund is situated in Australia

The first test requires that, at a time, and for the income year in which that time occurs, the fund was established in Australia, or any asset of the fund is situated in Australia at that time.

The establishment of the fund requirement in paragraph 295-95(2)(a) of the ITAA 1997 is a once and for all requirement. That is, once it is determined that a fund was established in Australia, it will satisfy the first test at all relevant times. If it is determined that the fund was not established in Australia, then the alternative requirement in paragraph 295-95(2)(a), namely location of the assets of the fund, must be considered.

In this case, the Fund was not established in Australia, but in Y. It only holds amounts contributed to it by the beneficiaries of the trust whilst living overseas.

Test Two - The central management and control of the fund ordinarily in Australia

The second test, and one of the key requirements that a superannuation fund must satisfy to be an 'Australian superannuation fund' at a particular time, is that the central management and control (CM&C) of the fund is ordinarily in Australia. Generally, the location of where important decisions are made is the location of the relevant management and control.

Whether the CM&C of a fund is ordinarily in Australia at a particular time is to be determined by the relevant facts and circumstances of each case. It involves determining whether, in the ordinary course of events, the CM&C of the fund is regularly, usually or customarily exercised in Australia. There must be some element of continuity or permanence if the CM&C of the fund is to be regarded as being 'ordinarily' in Australia.

In this case, the Fund was incorporated outside Australia. The directors are X citizens domiciled outside Australia. The trustee holds its board meetings outside Australia on a permanent basis. There are no high level and strategic decisions of the Fund made within Australia, nor are any high level duties and activities performed within Australia.

The central management and control of the Fund are not ordinarily in Australia. Therefore, this test is not satisfied.

Test Three - the 'active member' test

The terms of paragraph 295-95(2)(c) of the ITAA 1997 contemplate two situations:

·        the first situation is that the fund has no active members at a particular time; or

·        the second situation is where the superannuation fund does have an active member (as defined in subsection 295-95(3) of the ITAA 1997). In such a situation, the conditions in subparagraphs 295-95(2)(c)(i) and (ii) of the ITAA 1997 must be considered to determine whether the fund satisfies the active member test.

All members of the Fund are non-residents. No part of the assets of the Fund is attributable to superannuation interests held by active members who are Australian residents. Therefore, this test is not satisfied.

Conclusion

The Fund is a superannuation fund for Australian income tax purposes, having been established as an indefinitely continuing retirement fund.

For the Fund to be considered an Australian superannuation fund all the conditions for the purposes of subsection 295-95(2) of the ITAA 1997 need to be satisfied. The Fund does not meet the requirements to be an Australian superannuation fund because it does not meet the second or third tests. Therefore, the Fund is a foreign superannuation fund.