Edited version of private advice

Authorisation Number: 1051637376894

Date of advice: 4 March 2020

Ruling

Subject: International income

Question 1

Is the Foreign Fund Number 1 a foreign superannuation fund?

Answer

Yes

Question 2

Is the Foreign Fund Number 2 a foreign superannuation fund?

Answer

Yes

Question 3

Is the Foreign Fund Number 3 a foreign superannuation fund?

Answer

Yes

Question 4

Are disability payments from the Foreign Fund Number 4 taxable in Australia?

Answer

Yes

Question 5

Are investment earnings in your Country A-based "Retirement Account" accounts taxable in Australia?

Answer

No

Question 6

If the answer to the above is yes, can you claim the losses in these accounts as a deduction?

Answer

Not applicable

Question 7

Are withdrawals from your Country A-based "Retirement Accounts" taxable in Australia if the withdrawals take place after you turn 60?

Answer

Yes

Question 8

Are investment earnings in your Foreign Fund Number 5 in Country A (prior to commencing an annuity) taxable in Australia?

Answer

No

Question 9

If the answer to the above is yes, can you claim the losses in these accounts as a deduction?

Answer

Not applicable

Question 10

When you commence an annuity from the Foreign Fund Number 5 in Country A, will these annuity payments be taxable in Australia?

Answer

Yes

Question 11

Are Social Security disability payments paid by the Country A Social Security Department taxable in Australia under the Double Tax Agreement?

Answer

No

Question 12

Are the disability payments received from the Foreign Fund Number 6 taxable in Australia?

Answer

Yes

Question 13

Are the disability payments received from the Foreign Fund Number 7 taxable in Australia?

Answer

Yes

Question 14

Are the disability payments received from the Foreign Fund Number 8 taxable in Australia?

Answer

Yes

This review applies for the following period

Year ended 30 June 2019

The scheme commences on

1 July 2018

Relevant facts and circumstances

Foreign Fund Number 1

The Foreign Fund Number 1 is a multi-employer, defined benefit pension plan that provides retirement benefits and related benefits to employees in the electrical industry.

The Trustees of the fund are certain senior leadership individuals in the industry.

The document 'Summary Plan Description describes the benefits payable by the Plan and the requirements for eligibility.

The Summary states, inter alia:

Section 7 - Types of Benefits

The fund provides three types of benefits:

·   Retirement Benefits

·   Disability Benefits

·   Pre-Retirement Spouse Benefits

The Foreign Fund Number 2

The Foreign Fund Number 2 is a defined benefit pension plan sponsored and administered by the Board of Trustees of the Industry.

The fund is governed by the rules set out in the Plan's Constitution and other Plan documents.

The document the Plan Description describes the benefits payable by the Plan and the requirements for eligibility.

The Plan Description states, inter alia:

PENSION BENEFITS Effective for Retirements on or After June 1, 2016.

...

There are various types of pensions offered under the Plan. Each of the

types of pensions has its own eligibility requirements.

...

Normal Retirement Pension

...

Standard Pension

...

Early Retirement Standard Pension

...

Vested Pension

...

Disability Pension

...

The Foreign Fund Number 3

The Foreign Fund Number 3 is a defined benefit pension plan sponsored and administered by the industry.

The Trustees of the Plan are the International President, International Secretary-Treasurer, and members of the International Executive Council of the industry.

The Plan is governed by the rules set out in the Constitution and other Plan documents.

The document 'PENSION BENEFIT FUND - Summary Plan Description' (the Plan Description) describes the benefits payable by the Plan and the requirements for eligibility.

The Plan Description states, inter alia:

Benefits of "A" members in active participation on or after January 1, 2007.

...

1. Normal Pension. An "A" member in continuous good

standing with five (5) or more years immediately preceding his or

her application, who has attained the age of sixty-five (65) years,

shall receive pension benefits computed on the basis of four dollars

and fifty cents ($4.50) per month for each full year of such continuous

"A" membership. If a member's benefit will be $30.00 or less,

the member shall receive a one-time lump sum payment that will be

the actuarial equivalent of the benefit otherwise payable.

You also have an interest in two "Retirement Account" accounts in Country A which are tax-deferred retirement savings plans. The two accounts are:

A Deferred Salary Plan of the Industry

A Plan with Company A

You are also a participant in the Foreign Fund Number 4, which is a Defined Contribution Plan. You do not yet receive an annuity in respect of this plan.

The document 'Summary Plan Description' describes the benefits payable by the Plan and the requirements for eligibility, and states, at page 9:

The amount of the benefit paid to a Participant or a beneficiary is determined primarily by the amount of money in the Participant's account when the Participant retires at or after age 55, becomes disabled, terminates employment, or dies.

...

In addition to the account balance, the beneficiary of certain Participants may also receive a death benefit, as described below.

The international tax agreement between Australia and Country A provides that a pension or annuity from a Country A Fund will be taxable in Australia.

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

Income Tax Assessment Act 1936;

Income Tax Assessment Act 1997 subsection 6-5(2);

International Tax Agreements Act 1953 sections 4 and 5; and

Convention between the Government of Australia and the Government of Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (Country A Convention)

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:

                                          i.    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 ...

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.

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 accordance with section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for one or more of the 'core purposes'; or one or more of the 'core purposes' and one or more of the 'ancillary purpose', namely for the provision of benefits to a member on or after:

·   retirement from gainful employment; or

·   attaining a prescribed age; or

·   the member's death (this may require the benefits being passed on to a member's dependents or legal representative); or

·   the termination of member's employment with an employer who had, at any time, contributed to the fund in relation to the member; or

·   the member's cessation of work for gain or reward on account of ill-health.

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.

Each of these three foreign funds will be addressed in turn.

Question 1

Foreign Fund Number 1

The fund is a foreign superannuation fund.

According to the Summary, members are able to access their benefits in the fund upon retirement, invalidity or death

The Summary does not state that members can access their benefits in the fund for any reasons other than retirement purposes.

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

Question 2

Foreign Fund Number 2

The fund is a foreign superannuation fund.

According to the Plan Description, members are able to access their benefits in the fund upon retirement, invalidity or death

The Plan Description does not state that members can access their benefits in the fund for any reasons other than retirement purposes.

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

Question 3

Foreign Fund Number 3

The fund is a foreign superannuation fund.

According to the Plan Description, members are able to access their benefits in the fund upon retirement, invalidity or death

The Plan Description does not state that members can access their benefits in the fund for any reasons other than retirement purposes.

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

Question 4

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Assessable income consists of ordinary income and statutory income provided it is neither exempt nor non-assessable non-exempt income.

Disability payments are ordinary income assessable under subsection 6-5(2) of the ITAA 1997.

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country A Agreement is listed in section 5 of the Agreements Act.

The agreement between Australia and the Country A operates to avoid the double taxation of income received by residents of Australia and Country A.

The Country A agreement considers the tax treatment of pensions, annuities, alimony and child support. The relevant paragraph in this case is paragraph 1 of article XX of the agreement.

(1) Subject to the provisions of Article XY (Governmental remuneration), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.

Consequently your disability payments will be taxed in Australia under article XX of the DTA between Australia and Country A as according to article XX Australia has the taxing rights as the disability payments are in relation to past employment.

Question 5

A Country A "Retirement Account" plan is a defined-contribution retirement account offered by employers to their employees.

A participant in such a plan may withdraw money from his or her plan before reaching retirement age, though this will attract additional excise tax.

Such plans do not meet the 'sole purpose test' and therefore cannot be considered 'superannuation funds' for Australian income tax purposes.

Because the benefits in your two plans are also paid for other than retirement purposes, the plans do not meet the 'sole purpose test' and therefore cannot be considered 'superannuation funds' for Australian income tax purposes.

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

In your circumstances the earnings of the plans are not your income as they are earnings of a foreign trust rather than your individual earnings. As such, they are not taxable in Australia when received by the fund.

Question 6

In a similar manner, any losses in the 'Retirement Account" plans are also not allowable as they belong to a foreign trust.

Question 7

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 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.

Consequently, the assessable amount is the total amount received less any amounts deposited to the fund (the corpus) by you, or on your behalf. The rule is that you are 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.

Operation of the double tax agreement between Australia and Country A

In determining liability to tax on foreign sourced income received by a tax resident of Australia it is also necessary to consider any applicable double tax agreement contained in the International Tax Agreements Act 1953.

The agreement between Australia and Country A does not contain any articles that specifically relate to the receipt of funds from a foreign retirement or investment fund, so Article XX which deals with income not expressly mentioned in the agreement will apply.

Article XX provides that income of a resident of one of the countries which is not expressly mentioned in the other articles of the agreement will be taxable only in the country of residency. However, if such income is derived by a resident of one of the countries from sources in the other country, such income may also be taxed in the country in which it has its source.

Therefore, the Country A agreement allows both Australia and Country A to tax any withdrawals made from the 'Retirement Account" funds.

Explanation of 102AAM

Section 102AAM of the ITAA 1936 operates so that where the trustee of a non-resident estate trust pays an amount to an Australian resident beneficiary that is assessable under section 99B of the ITAA 1936, the beneficiary is liable to pay interest on an amount treated as income tax paid late on all, or part of, the distribution. The interest is intended to make up for the deferral of Australian tax on any accumulated income not taxed in a previous year of income of the non-resident trust.

The provision applies to 'eligible designated concession income' derived in listed and unlisted countries. Country A is a listed country.

Broadly, eligible designated concession income in relation to Country A is income derived from passive investments in Country A which is either not subject to tax, or taxed at less than the normal company tax rate (section 317 of the ITAA 1936 and Regulation 17 of the Income Tax Assessment (1936 Act) Regulation 2015).

Specifically, in relation to a listed country, subsection 102AAM(1) of the ITAA 1936 states, if:

a)    an amount is included in the assessable income of a taxpayer of a year of income (which year of income is in this section called the current year of income), being the year of income commencing on 1 July 1990 or a subsequent year of income, under section 99B in relation to a trust estate; and

b)    the whole or a part of the amount so included in the taxpayer's assessable income (which whole or part is in this section called the distributed amount) is attributable to:

(i) if the trust estate was a listed country trust estate in relation to a particular non-resident year of income of the trust estate (in this section called the non-resident trust's year ofincome) - so much of the income and profits of the trust estate of the non-resident trust's year of income as represents eligible designated concession income in relation to any listed country in relation to the non-resident trust's year of income;......

then:

c)    the distributed amount is the distributed amount of the non-resident trust's year of income; and

d)    the taxpayer is the original taxpayer in relation to the distributed amount of the non-resident trust's year of income.

Paragraph 102AAM(1A)(a) of the ITAA 1936 states that, unless the contrary is established by a taxpayer, a distributed amount in relation to a listed country trust estate in relation to a non-resident trust's year of income is taken to be wholly attributable to income and profits of the trust estate of that year of income that represent eligible designated concession income in relation to a listed country.

Therefore, the onus is on the taxpayer to provide evidence that the amount was not paid out of income and profits that are eligible designated concession income.

The interest is calculated using the formula in subsection 102AAM(2) of the ITAA 1936.

Question 8

As outlined in Question 5 above, the earnings in your annuity plan are not your income as they are earnings of a foreign trust rather than your individual earnings. As such they are not taxable in Australia when received by the fund.

The growth in an annuity is not taxable under Section 27H before you begin taking the annuity.

Growth in an annuity (or similar losses, if any) are also not assessable in Australia as they are regarded as external earnings in a foreign trust.

Question 9

As per the explanation above the losses made in the fund are not available to you when incurred by the fund.

Question 10

Section 27H of the ITAA 1936 includes in assessable income the amount of a superannuation pension or annuity derived in an income year, excluding the 'deductible amount' for that pension or annuity. The deductible amount represents a portion of the 'undeducted purchase price' of the pension or annuity. The deductible amount is excluded from the assessable amount of the pension or annuity. It is tax free to the recipient because it represents the return to the pensioner or annuitant of the amount paid to acquire the pension or annuity.

As you have not yet begun to receive annuity payments from the foreign fund, the ATO would not be prepared to issue a private ruling on the exact figure of deductible amount. This is because the Commissioner will decline to make a private ruling where the correctness of the ruling would depend on us making certain assumptions such as the share of the pension payable, and the foreign currency exchange rate that applies at certain future dates. The Commissioner would not consider it to be appropriate to make these assumptions.

The following general guidance is provided. This advice is not binding on the Commissioner of Taxation.

Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) operates to include in assessable income the amount of any pension derived by a taxpayer during a year of income reduced by the annual deductible amount.

The deductible amount is deemed to be a return of part of your contribution towards the purchase of the pension.

The deductible amount is calculated based on the UPP of your pension.

The UPP is the amount you contributed towards the purchase price of your pension for which you did not claim, and were not eligible to claim, a tax deduction in Australia. Contributions made by an employer or by another person under an agreement to which the employer was a party, cannot form part of the UPP of the pension.

Under subsection 27H(2) of the ITAA 1936, the annual deductible amount of a superannuation pension is ascertained in accordance with the formula:

where:

A = is the relevant share of the pension payable in relation to the year of income (if all of the pension is payable to you, A = 1)

B = is the amount of the UPP of the pension as calculated under IT 2272

C = is the residual capital value, and

D = is the relevant number in relation to the pension.

The UPP cannot be calculated until such time as you begin to receive annuity payments. When you begin to receive annuity payments, they will be able to calculate the UPP.

An annuity is statutory income assessable under subsection 6-10(2) of the ITAA 1997.

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country A Agreement is listed in section 5 of the Agreements Act.

The agreement between Australia and Country A operates to avoid the double taxation of income received by residents of Australia and Country A.

The Country A agreement considers the tax treatment of pensions, annuities, alimony and child support. The relevant paragraph in this case is paragraph 1 of article XX of the agreement.

(1) Subject to the provisions of Article XY (Governmental remuneration), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.

Consequently your pension payments will be taxed in Australia under article XX of the DTA between Australia and Country A as according to article XY Australia has the taxing rights as the pension payments are in relation to past employment.

Question 11

Article XX of the Country A Convention outlines that disability payments paid by one of the contracting states who is resident in the other state shall only be taxable in the first-mentioned state. Accordingly this pension is only taxable in Country A and is not taxable in Australia.

Question 12

Pension payments received from any pension plan would normally be taxable in Australia unless they are specifically exempted by the operation of Section 11-15 of the Income Tax Assessment Act 1997 (ITAA 1997).

As this pension is not listed in this section it is not exempt and is therefore taxable in Australia.

Question 13

Pension payments received from any pension plan would normally be taxable in Australia unless they are specifically exempted by the operation of Section 11-15 of the Income Tax Assessment Act 1997 (ITAA 1997).

As this pension is not listed in this section it is not exempt and is therefore taxable in Australia.

Question 14

Pension payments received from any pension plan would normally be taxable in Australia unless they are specifically exempted by the operation of Section 11-15 of the Income Tax Assessment Act 1997 (ITAA 1997).

As this pension is not listed in this section it is not exempt and is therefore taxable in Australia.