Edited version of private advice

Authorisation Number: 1051642886914

Date of advice: 10 March 2020

Ruling

Subject: Foreign source income

Question

Is any part of a lump payment to be received from a foreign retirement account assessable as applicable fund earnings as worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question

Are earnings of your Country A retirement plan assessable under section 99B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question

Is Foreign Income Tax Offset applicable in respect of Country A tax paid on the assessable income received from your retirement plan at the rate of 15%?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

You are a Country A citizen who became an Australian tax resident in late 20XX. In an earlier residence in Australia you applied for Australian citizenship which was granted in 19XX. Thus you are a citizen of both Country A and Australia.

You are retired and now depend on investments for your primary income. You currently do not own any investment properties.

You hold a non-Australian retirement plan (RP) and you wish to withdraw funds from this in future years. The balance of this RP is not "locked in" and hence funds are available for withdrawal before retirement age. The value of this fund at 31 March 20XX was $XXX.

You now wish to withdraw lump sums from your RP to fund your retirement.

The total amount of contributions made by you to the plan was $YYY. You have not made any contributions to the plan since becoming an Australian resident.

You have not made any contributions to this RP since you became an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B.

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 301-10

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 section 960-50

Income Tax Assessment Act 1997 subsection 960-50(1)

Income Tax Assessment Act 1997 subsection 960-50(4)

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

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 paragraph 99B(2)(a)

Income Tax Assessment Act 1936 subsection 481(3)

Superannuation Industry (Supervision) Act 1993 section 10

Convention between Australia and 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

Summary

Any lump sum payment to be made from the Plan will not be considered a payment from a 'foreign superannuation fund', therefore, subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) has no application in this case.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds.

Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income.

Before determining whether an amount is assessable under section 305-70, 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 subdivision 305-B will not apply.

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.

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 'core 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.

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 Plan satisfies some of the requirements of a foreign superannuation fund as it is established and operated outside Australia and the central management and control is outside of Australia. However, the Fund is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purposes of the individual's retirement. Members can withdraw their benefits at any time without a requirement to meet a condition of release. In other words, the Plan provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

Accordingly, the Plan 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.

Consequently, subdivision 305-B of the ITAA 1997 will not apply to any lump sum payments made to your client from the Plan.

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, you have indicated that as well as providing benefits on retirement, invalidity and death, the Foreign Fund also provides benefits for purposes such as:

·   to pay medical costs incurred by the Participant, including medical insurance and hospitalisation expenses;

·   to purchase the Participants home; or

·   to pay education expenses.

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

Accordingly, the Foreign 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.

Receipt of trust income not previously subject to tax in Australia

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 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.

The whole amount of the earnings is assessable in Australia not just the earnings that accrued from when you became a resident of Australia for taxation purposes.

This is consistent with the Commissioners view in ATO ID 2011/93.

The earnings must be included in your Australian tax return in the year you withdraw the lump sum amount from the fund.

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. The definition of listed countries is available at section 320 of the Income Tax Assessment Act 1936 (ITAA 1936).

Broadly, eligible designated concession income in relation to from a listed country is income derived from passive investments 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.

Foreign Income Tax Offset (FITO)

Taxation ruling IT 2507 deals with foreign income tax offsets -

5. Subject to the provisions of Division 18 of Part III of the Income Tax Assessment Act 1936, a taxpayer will be entitled to a credit against Australian tax payable on foreign income for any of the foreign taxes listed below paid in respect of that income (changes and additions to the taxes listed in IT 2437 are marked with an asterisk):

With respect to Country A the ruling states -

Income taxes imposed by the Government of Country A

The foreign income tax offset is calculated using the method explained on the Australian Taxation Office website on the page titled "Calculating and claiming your foreign income tax offset" (type QC 58647 into search bar at ato.gov.au).

You wish to withdraw lump sums from your RP to fund your retirement. Such contributions would not constitute a pension or annuity; so the provisions of Article XX, not Article YY of the Country A Convention apply.