Edited version of private advice

Authorisation Number: 1051848197101

Date of advice: 4 June 2021

Ruling

Subject: Foreign superannuation fund

Question

Is the Retirement Benefits Scheme established overseas a superannuation fund for the purposes of Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You emigrated from overseas and entered Australia 20XX on a tourist visa (Residency Date). Since 20XX, you have lived permanently in Australia and granted a Permanent Resident Visa 20XX.

In 20XX while a tax resident overseas you became a member of an overseas Retirement Benefit Scheme (the Scheme).

The Scheme is a defined benefits scheme, with pensions paid out equalling only the value of net invested funds.

The Scheme is a registered retirement scheme by an overseas Services Authority.

The Scheme is a Qualifying Recognised Overseas Benefit Scheme (QROPS) under overseas law.

Under the Scheme, a member may withdraw up to 25% of their funds as a Pension Commencement Lump Sum (PCLS). The residual funds not withdrawn as a PCLS can subsequently be withdrawn under a Flexi-Access Drawdown process (FAD). The FAD allows a member to drawdown a variable income (regular or irregular), without limitation on the frequency or size of the drawn down.

Relevantly, the Scheme policy document provides that benefits may be accessed in the following circumstances:

•         retirement;

•         invalidity; and

•         death of the member.

In 20XX you transferred amounts into the Scheme.

You no longer have an interest in any of these Pension Schemes.

You have had no periods of non-residency since your Residency Date.

You intend to commence the following pension drawdowns.

You intend to invest the funds withdrawn directly into a personal owned investment portfolio in Australia, either in your name or the name of your spouse. It will not be invested in an Australian superfund.

You advised in a telephone conversation 20XX that you had made an application to withdraw an amount, but you have not yet received the funds.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 305-B.

Income Tax Assessment Act 1997 section 305-70.

Income Tax Assessment Act 1997 section 305-75.

Income Tax Assessment Act 1997 section 305-80.

Income Tax Assessment Act 1997 section 306-60.

Income Tax Assessment Act 1997 section 307-15.

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

Income Tax Assessment Act 1997 section 960-50(1).

Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision

Summary

The Scheme is a superannuation fund for the purposes of subdivision 305-B of the ITAA 1997.

Detailed reasoning

Lump sum payments from foreign superannuation funds

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

In accordance with sections 305-60 of the ITAA 1997, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income.

If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable income.

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection995-1(1) of the ITAA1997 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, subsection295-95(2) of the ITAA1997 defines an 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 ...

Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would not qualify as an Australian superannuation fund and would, therefore be a foreign superannuation fund in accordance with subsection 995-1(1) of the ITAA1997.

Meaning of 'superannuation fund

Subsection 995-1(1) of the ITAA1997 defines a superannuation fund as having the same meaning given by section10 of the Superannuation Industry (Supervision) Act1993 (SISA), that is:

(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;

The High Court examined both the terms superannuation fund and fund in Scott v.Commissioner of Taxation of the Commonwealth (No.2) (1966)10AITR290; (1966)40ALJR265; (1966)14ATD333 (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 judgement 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 (Sole purpose test), a regulated superannuation fund must be maintained solely for the provision of benefits specified in subsection 62(1) of the SISA. The 'core purposes' specified in that subsection relate to providing retirement or death benefits for, or in relation to, fund members; and the 'ancillary purposes' relate to the provision of benefits on the cessation of a member's employment and other death benefits and other approved benefits.

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) 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.

The information provided indicates that you could only access your benefits in the Scheme in limited circumstances including retirement, invalidity or death. As such, the Scheme meets the definition of a foreign superannuation fund.

In addition, it is clear that the Scheme is established outside of Australia and its central management and control is outside of Australia. Therefore, on the basis of information provided, we consider that the Fund is a foreign superannuation fund for the purposes of subdivision 305-B of the ITAA 1997.

Taxation of foreign lump sum payments

As you will receive the lump sum more than six months after their residency, section 305-70 of the ITAA 1997 applies to the lump sum received so that the amount of applicable fund earnings (if any) in respect of the lump sum is included in the Taxpayer's assessable income.

Applicable fund earnings

The applicable fund earnings amount is worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

As you became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings is worked out in accordance with subsection 305-75(3) of the ITAA 1997 which states:

If you become an Australian resident after the start period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows:

(a)  Work out the following amounts:

(i)        The amount in the fund that vested in you just before the day (the start day) you first became an Australian resident during the period.

(ii)       the part of the payment that is attributable to contributions to the fund made by or in respect of you during the remainder of the period;

(iii)      the part of the payment (if any) that is attributable to amounts transferred into the fund from any other *foreign superannuation fund during the period;

(b)  subtract that total amount in the fund that was vested in you when the lump sum was paid (before any deduction for *foreign tax);

(c)   multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

(d)  add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

The effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the Fund during the residency period. Earnings made during periods of non-residency, and contributions and transfers into the Fund, do not form part of the taxable amount when the lump sum benefit is paid.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars (A$). The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 to amounts that are elements in the calculation of another amount you need to:

•         first, translate any amounts that are elements in the calculation of other amounts, (except special accrual amounts); and

•         then, calculate the other amounts.

In ATO Interpretative Decision ATO ID 2015/7: Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997 (ATO ID 2015/7), the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date. All exchange rates are published on the ATO's website.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of the lump sum to be received from the Fund should be calculated by deducting the Australian dollar equivalent of the amount vested in you just before the residency date from the amount vested in you on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt.