Edited version of private advice

Authorisation Number: 1051638272757

Date of advice: 12 March 2020

Ruling

Subject: Lump sum payment from foreign superannuation funds

Question 1

Does XX schemes, comprising the (b) Plan and the (a) Retirement Plan, meet the definition of a 'foreign superannuation fund' under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is any part of the lump sum benefits received by you from the XX schemes assessable income under section 305-70 of the ITAA 1997?

Answer

No

Question 3

Is any part of the lump sum benefits received by you from the XX schemes assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You were a named beneficiary for your deceased family member's XX retirement accounts.

You received a letter from XX requesting your instruction on how you would like to proceed with your 'inherited amount'.

Subsequently, you have completed the required process and withdrawn the whole 'inherited amount' as a lump sum from the XX retirement account and transferred this lump sum back into your Australian bank account in foreign currency.

According to your Confirmation Statements from XX, the schemes included:

·         (b) Plan

·         (a) Plan

The (b) Plan and (a) Plan are schemes provided to eligible employees of the employer as a part of the employer's retirement program. The purpose of these schemes is to encourage eligible employees to put money aside for their retirement.

Under the rules of these schemes, as noted in the Summary Plan Description, a member who is currently employed is generally not allowed to withdraw their benefits until they reach a certain age. The rules of these pension schemes state this as follows:

1. (b) Plan

·         When a member has attained age X, they may elect to withdraw all or part of your account attributable to Unmatched Contributions or Roth Unmatched Contributions; provided that distributions from annuity contracts are subject to the terms of those contracts.

·         When a member has attained age Y, they may elect to take a distribution of any portion of your account if either:

-        they are no longer eligible for allocations of matching contributions under the (a) Plan (for a reason other than a failure to contribute to the (b) Plan), or

-        they have entered into a phased retirement agreement.

2. (a) Plan

·         When a member has attained age Y, they may elect to take a distribution of the vested portion of your account if either:

-        they are no longer eligible for allocations of matching contributions under the (a) Plan (for a reason other than a failure to contribute to the (b) Plan), or

-        they have entered into a phased retirement agreement.

However, the rules of these schemes state that if a member terminates their employment, they do not have to wait until a certain age to withdraw their benefits. These benefits can be withdrawn for any purpose, including non-retirement purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

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

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

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

International Tax Agreements Act 1953

Reasons for decision

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

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.

Subsection 6-10(4) of the ITAA 1997 states that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia.

In determining liability to tax on Australian sourced income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

Schedule X to the Agreements Act contains the Convention between Australia and the Country Y (the Y Convention). The Y Convention operates to avoid the double taxation of income received by Australian and the Y residents.

Article (Income not expressly mentioned) of the Y Convention allocates taxing rights in relation to income not dealt with by the preceding Articles of the Convention. Lump sum 'inherited amount' payments from pension schemes are not dealt with by any of those Articles and therefore they fall within the scope of this article.

Article the Y Convention provides that items of income are not expressly mentioned in a specific article shall be taxed in the country of residence.

The lump sum 'inherited amount' payment you received is not covered by any of the other Articles in the Y Convention. As you derived the income as an Australian resident, it is taxable in Australia.

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 section 305-70 of the ITAA 1997 and section 99B of the ITAA 1936.

Section 305-70 of the ITAA 1997

Section 305-70 of the ITAA 1997 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum in their assessable income.

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 fundand 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 the case of Baker v FC of T 2015 ATC 10-399; (2015) AATA 469, Justice O'Loughlin stated that:

a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund....Accordingly, for a payment to be a payment from a scheme for the payment of benefits in the nature of superannuation upon retirement the scheme would need to provide for payments that have the essential qualities, character or features of payments of superannuation benefits on retirement. Further, the scheme would need to be such that such payments were more than just possibilities among a range of alternatives such as simple withdrawals available at any time.

In paragraph 62(1)(a) of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member only when one of the following events occurs:

·         on or after retirement from gainful employment

·         attaining a prescribed retirement age

·         the member dies (which may require the benefits to be passed on to the member's dependants or legal representative).

The SISA and the Superannuation Industry (Supervision) Regulations 1994 (SISR) provide guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. This guidance is still relevant to understanding the purpose of foreign superannuation funds, even though the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA) that are established in Australia and operate in Australia.

In view of the legislation and decisions made in Scott, Mahony and Baker cases, 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 it is clear that these schemes were 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 case facts suggest that when members of these retirement schemes terminate their employment, they are allowed to withdraw funds at any time before retirement age for non-retirement purposes.

As a result, these schemes do not meet the definition of a 'foreign superannuation fund' under subsection 995-1(1) of the ITAA 1997. Therefore, section 305-70 of the ITAA 1997 does not apply in this case.

Section 99B of the ITAA 1936

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 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.

A trust is an arrangement where a person or company (the trustee) holds assets (trust property) in trust for the benefit of others (the beneficiaries). A superannuation fund is a special type of trust, set up and maintained for the sole purpose of providing retirement benefits to its members (the beneficiaries).

In this case, these schemes do not meet the definition of a 'foreign superannuation fund' under subsection 995 1(1) of the ITAA 1997. Therefore they are foreign trusts estates for which section 99B would apply to tax distributions made to, or for the benefit of, resident beneficiaries.

You are a resident of Australia for taxation purposes, and you are a beneficiary of Y country retirement schemes, you will include in your assessable income, pursuant to section 99B, all amounts paid to you, or applied for your benefit, from these schemes, subject to the exclusion contained in subsection 99B(2)(a).