Edited version of private advice

Authorisation Number: 1051662345505

Date of advice: 3 August 2020

Ruling

Subject: Lump sum payment(s) from a foreign retirement fund

Question 1

Will subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to any lump sum payment(s) you may receive from a foreign retirement fund so that an applicable fund earnings amount (worked out under section 305-75 of the ITAA 1997) will need to be included in your assessable income?

Answer

No.

Question 2

Will any part of the lump sum payment(s) you may receive from a foreign retirement fund be assessable under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

Income years ending 30 June 20XX, 30 June 20XX, 30 June 20XX and 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In the private ruling application we received, we were advised that:

·         You are an Australian tax resident.

·         You are not a tax resident or citizen of the Country A.

·         You met your late husband in the Country A.

·         You married your late husband and then both moved to Australia.

·         Your late husband was diagnosed with illness several years later. However, he continued to manage his retirement funds in the Country A and consolidated them into a foreign retirement fund.

·         Your late husband passed away and you inherited his foreign retirement fund during 20XX-XX income year.

·         You did not receive any distributions from his foreign retirement fund in previous income years.

·         You do not have clear records of the contributions made by, or on behalf of, your late husband in respect of his retirement funds in the Country A which were consolidated into his foreign retirement fund. However, you have managed to determine the corpus based on investment reports and expected investment returns.

·         When your late husband resided in the Country A he worked for a university. Contributions were made into two university funds which totalled two amounts.

·         The contributions in the two university funds were then rolled over into his foreign retirement fund.

·         When your late husband resided in the Country A, he also had another foreign retirement fund which was later transferred into his foreign retirement fund which totalled an amount.

·         His foreign retirement fund was valued at an amount on a certain date.

·         You plan to withdraw an amount or amounts from his foreign retirement fund as either a one-off lump sum payment or through a series of withdrawals which would occur on different dates.

·         You recently submitted a form to advise that you intend to rely on an article within the Country A - Australia Double Tax Agreement and therefore no withholding tax should be applied to any withdrawals made from his foreign retirement fund.

You are able to make withdrawals at any time on different dates from his foreign retirement fund. A manual distribution can be requested from his foreign retirement fund as either a lump sum distribution or in smaller increments throughout the income year.

No rollovers had occurred into his foreign retirement fund after he passed away.

The further information advised the following:

·         You were the beneficiary of his foreign retirement fund.

·         The amounts held in the two university funds were automatically rolled over into his foreign retirement fund after he passed away.

·         The amount held in his other foreign retirement fund was rolled over into his foreign retirement fund before he passed away.

·         You did not have any beneficial ownership of the amounts held in the two university funds or his other foreign retirement fund before he passed away. However, you were listed as a primary beneficiary in the event of his death.

·         He was assessable on the attributable income of these previous funds.

Assumptions

Your late husband's foreign retirement fund comprises of pre-tax contributions, post-tax contributions and investment income. His foreign retirement fund has accepted the form and will not apply any withholding tax to any withdrawals made.

Relevant legislative provisions

Income Tax Assessment Act 1936, subsection 99B(1)

Income Tax Assessment Act 1936, subsection 99B(2)

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

Income Tax Assessment Act 1997, subsection 6-10(2)

Income Tax Assessment Act 1997, subsection 6-10(4)

Income Tax Assessment Act 1997, section 10-5

Income Tax Assessment Act 1997, section 295-95

Income Tax Assessment Act 1997, subdivision 305-B

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

Superannuation Industry (Supervision) Act 1993, subsection 10(1)

Superannuation Industry (Supervision) Act 1993, section 19

Superannuation Industry (Supervision) Act 1993, section 62

Reasons for decision

Summary

Your late husband's foreign retirement fund is not a foreign superannuation fund or a foreign 'scheme for the payment of benefits in the nature of superannuation upon retirement or death'. Therefore, subdivision 305-B of the ITAA 1997 will not apply to any lump sum payment(s) you may receive from his foreign retirement fund and you are not required to include an applicable fund earnings amount (worked out under section 305-75 of the ITAA 1997) in your assessable income.

As withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from your late husband's foreign retirement fund are assessable under subsection 99B(1) of the ITAA 1936 subject to the exclusions under subsection 99B(2) of the ITAA 1936.

Detailed reasoning

Lump sum payments made from foreign superannuation funds or foreign 'schemes for the payment of benefits in the nature of superannuation upon retirement or death'

Subdivision 305-B of the ITAA 1997 sets out the tax treatment for lump sum payments made from foreign superannuation funds or foreign 'schemes for the payment of benefits in the nature of superannuation upon retirement or death'.

It is necessary to determine whether a lump sum payment has been made from a foreign superannuation fund or a foreign 'scheme for the payment of benefits in the nature of superannuation upon retirement or death' before considering the application of subdivision 305-B of the ITAA 1997. If a lump sum payment has not been made from a foreign superannuation fund or a foreign 'scheme for the payment of benefits in the nature of superannuation upon retirement or death', subdivision 305-B of the ITAA 1997 will not apply.

Meaning of 'foreign superannuation fund' and foreign 'scheme for the payment of benefits in the nature of superannuation upon retirement or death'

Subsection 995-1(1) of the ITAA 1997 defines the phrase 'foreign superannuation fund'. It states:

In this Act, except so far as the contrary intention appears:

foreign superannuation fund:

(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 995-1(1) of the ITAA 1997 confirms that the phrase 'Australian superannuation fund' is defined in section 295-95 of the ITAA 1997.

Subsection 295-95(2) of the ITAA 1997 states:

A superannuation fund is an Australian superannuation fundat 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; 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.

The three tests set out in subsection 295-95(2) of the ITAA 1997 must be satisfied at the same time. If a superannuation fund fails to satisfy one of the tests at a particular time, it will not be an 'Australian superannuation fund' at that time.

A superannuation fund that is established, managed or controlled outside of Australia or has all of its assets outside of Australia would qualify as a 'foreign superannuation fund.' This would not change even if some of its members were Australian residents.

Subsection 305-55(2) of the ITAA 1997 confirms that subdivision 305-B of the ITAA 1997 also applies to lump sum payments (other than pension payments) made from foreign 'schemes for the payment of benefits in the nature of superannuation upon retirement or death' that:

·         are not, and never have been, an Australian superannuation fund or a foreign superannuation fund; and

·         were not established in Australia; and

·         are not centrally managed or controlled in Australia.

Meaning of 'superannuation fund'

Subsection 995-1(1) of the ITAA 1997 defines the phrase 'superannuation fund'. It states:

In this Act, except so far as the contrary intention appears:

superannuation fund has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993.

Subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 states:

In this Act, unless the contrary intention appears:

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 'a provident benefit, superannuation or retirement fund'

The phrases 'superannuation fund' and 'fund' were examined 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 also examined in Mahony v Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

In that case, Justice Kitto stated 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'.

Justice Kitto's judgment in Mahony indicates that a fund is not a 'provident, benefit or superannuation fund' if there are provisions for paying benefits 'for any other reason whatsoever'. Although a fund may contain provisions for retirement purposes, it cannot be accepted as a superannuation fund if it contains provisions for benefits to be paid in circumstances other than the member's retirement.

In the case of Baker v Federal Commissioner of Taxation 2015 ATC 10-399; (2015) AATA 469(Baker), Senior Member 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.

Subparagraph 62(1)(a) of the Superannuation Industry (Supervision) Act 1993 sets out the core purposes for which a 'regulated superannuation fund' must be maintained. It states:

Each trustee of a regulated superannuation fund must ensure that the fund is maintained solely:

(a)  for one or more of the following purposes (the core purposes):

(i)  the provision of benefits for each member of the fund on or after the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member's retirement occurred before, or occurred after, the member joined the fund);

(ii)  the provision of benefits for each member of the fund on or after the member's attainment of an age not less than the age specified in the regulations;

(iii)  the provision of benefits for each member of the fund on or after whichever is the earlier of:

(A) the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; or

(B)  the member's attainment of an age not less than the age prescribed for the purposes of subparagraph (ii);

(iv)  the provision of benefits in respect of each member of the fund on or after the member's death, if:

(A)  the death occurred before the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; and

(B)  the benefits are provided to the member's legal personal representative, to any or all of the member's dependants, or to both;

(v)  the provision of benefits in respect of each member of the fund on or after the member's death, if:

(A)  the death occurred before the member attained the age prescribed for the purposes of subparagraph (ii); and

(B)  the benefits are provided to the member's legal personal representative, to any or all of the member's dependants, or to both.

Although the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994 only apply to 'regulated superannuation funds' (as defined in section 19 of the Superannuation Industry (Supervision) Act 1993), their provisions are still relevant to understanding the objectives and purposes of foreign retirement funds.

In view of the above, it can be stated that a foreign retirement fund can only be classified as a foreign superannuation fund or a foreign 'scheme for the payment of benefits in the nature of superannuation upon retirement or death' if it exclusively provides benefits for the core purposes of making payments upon a member's retirement, invalidity or death, or as otherwise specified under the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994.

A foreign retirement fund is not a foreign superannuation fund or a foreign 'scheme for the payment of benefits in the nature of superannuation upon retirement or death' for Australian income tax purposes if the foreign retirement fund allows for withdrawals for any purpose at any time at the complete discretion of the account holder prior to retirement, invalidity, death or other purposes as specified under the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994.

Assessable income 

The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the ITAA 1997).

Your withdrawal from the foreign retirement fund would not be ordinary income (subsection 6-5(2) of the ITAA 1997).

'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the ITAA 1936 which deals with receipt of trust income not previously subject to tax.

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, that 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) of the ITAA 1936 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) of the ITAA 1936);

·         amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936);

·         amounts previously included in the beneficiary's income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA 1936); and

·         an amount 'that is or has been included in the assessable income of any taxpayer (other than a company) under section 102AAZD of the ITAA 1936 (paragraph 99B(2)(d) of the ITAA 1936).

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) of the ITAA 1936).

As paragraph 99B(2)(d) of the ITAA 1936 excludes an amount that is or has been included in the assessable income of any taxpayer (other than a company) under section 102AAZD of the ITAA 1936, the amount is therefore excluded from being assessed to the beneficiary under subsection 99B(1) of the ITAA 1936, even though it was not included in the income tax return of the transferor and the Commissioner is out of time to amend the taxpayer's assessment.

Rollovers from previous funds

A taxpayer who is a resident of Australia for taxation purposes, and who is a beneficiary of a foreign trust, will include in their assessable income, pursuant to section 99B of the ITAA 1936, all amounts paid to them, or applied for their benefit, as a result of the winding up of their foreign trust.

Where the fund balance of an foreign trust is rolled over into another foreign trust, then an amount has been applied for the benefit of the resident beneficiary and will be included in that taxpayer's assessable income under section 99B of the ITAA 1936, subject to the exclusion contained in subsection 99B(2)(a) of the ITAA 1936. The key would be whether the taxpayer is taken to have beneficial ownership of the previous fund when the amounts are being rolled over.

To the extent that the amount rolled-over is in respect to contributions made into the foreign trust from deferred, pre-tax employment amounts, the amount would not be an amount to which subsection 99B(2)(a) of the ITAA 1936 applies. That is, it would represent an amount that, if derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income. That amount would be taxable in Australia.

To the extent that the amount rolled-over is in respect to contributions made into the foreign trust from post-tax amounts, the amount would be an amount to which subsection 99B(2)(a) of the ITAA 1936 applies. That is, an amount representing corpus of the trust estate. That amount would not be taxable in Australia.

To the extent that amounts rolled over represent amounts that have been included in a taxpayer's assessable income under section 102AAZD of the ITAA 1936, or have not but the Commissioner is out of time to amend, the amount would fall into the exclusion in paragraph 99B(2)(d) of the ITAA 1936. That amount would not be taxable in Australia.

To the extent that the amount rolled over represents earnings on amounts contributed into the fund, the amount would not be an amount to which subsection 99B(2)(a) of the ITAA 1936 applies. That is, it would represent an amount that, if derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income. That amount would be taxable in Australia.

Distributions from the foreign retirement fund

In regard to distributions from the foreign trust in which amounts were rolled over into, the amount that represents the rolled over amount would be an amount to which subsection 99B(2)(a) of the ITAA 1936 applies. That is, an amount representing the corpus of the trust estate. The amount would not be taxable in Australia.

To the extent that the amount withdrawn from the fund represents earnings on amounts contributed into the fund, the amount would not be an amount to which subsection 99B(2)(a) of the ITAA 1936 applies. That is, it would represent an amount that, if derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income. That amount would be taxable in Australia.

Application to your circumstances

In this case, you provided supporting documentation about your ability to make withdrawals from your late husband's foreign retirement fund. The supporting documentation indicated the following:

·         You are able to make withdrawals at any time on different dates from his foreign retirement fund.

·         A manual distribution can be requested from his foreign retirement fund as either a lump sum distribution or in smaller increments throughout the income year.

As withdrawals can be made from your late husband's foreign retirement fund at any time on different dates and not solely for retirement, invalidity, death or other purposes as specified under the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994, his foreign retirement fund is not a foreign superannuation fund or a foreign 'scheme for the payment of benefits in the nature of superannuation upon retirement or death' for Australian income tax purposes.

Therefore, subdivision 305-B of the ITAA 1997 will not apply to any lump sum payment(s) you may receive from your late husband's foreign retirement fund and you will not be required to include an applicable fund earnings amount (worked out under section 305-75 of the ITAA 1997) in your assessable income.

In your case, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from your late husband's foreign retirement fund are assessable under subsection 99B(1) of the ITAA 1936 subject to the exclusions under subsection 99B(2) of the ITAA 1936.