Edited version of private advice

Authorisation Number: 1051851356065

Date of advice: 16 June 2021

Ruling

Subject: Foreign trust distribution

Question 1

Is the Superannuation Fund (the Fund) established in a foreign country a superannuation fund for the purposes of Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Does section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) apply to include in your assessable income that part of the withdrawal from the Fund that comprises of earnings of the fund since the commencement date of the fund?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You joined a superannuation fund (the Fund) while you were living and working in a foreign country.

The Fund was governed by the Superannuation Act of the foreign country.

You and your employer made contributions to the Fund and the Fund derived interest income.

Under the Fund rules, members of the Fund are entitled to withdraw their savings on grounds of unemployment, retirement, permanent disability, death or emigration.

You emigrated from the foreign country after termination of your employment and became a resident of Australia for tax purposes several years ago.

In 20XX you withdrew your full balance from the Fund which was paid into your personal bank account.

You were less than X years old when you received the money from the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

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

Income Tax Assessment Act 1936 section 102AAM

Income Tax Assessment Act 1997 subsection 295 95(2)

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 section 305-60

Income Tax Assessment Act 1997 section 305-70

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

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Question 1

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 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 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;

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 fundin accordance with subsection 995-1(1) of the ITAA 1997.

Meaning of 'superannuation fund

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (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 fundand fund in Scott v. Commissioner of Taxation of the Commonwealth (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 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 access your benefits in the Fund in circumstances outside of retirement, invalidity or death; such as unemployment and emigration. As such, the Fund does not meet the definition of a foreign superannuation fund.

Question 2

Non-resident trust income

A distribution from a foreign fund that does not meet the definition of a foreign superannuation fund is subject to section 99B of the ITAA 1936 which deals with receipt of trust income not previously subject to tax in Australia.

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.

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 under subsection 99B(1) is not to include any amount that represents either:

a)    corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer; or

b)    amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; or

c)    amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936; or

d)    amounts included in assessable income under section 102AAZD of the ITAA 1936 (that is, amount included under the transferral trust measures for taxpayer having transferred property or services).

In your case, you have received an amount that represents the corpus of a trust; therefore, paragraph 99B(2)(a) of the ITAA 1936 applies to you so that:

•         the proportion of the withdrawal that represents amounts previously deposited to the Fund is excluded from your assessable income, and

•         the proportion of the withdrawal that represents earnings of the fund (from the commencement date of the Fund) is included in your assessable income as the Fund earnings (eg interest and dividends) are amounts that are not taken to represent corpus, as the earnings are attributable to income derived by the Fund which would have been subject to tax had the earnings been derived by a resident taxpayer.

Additional information

Section 102AAM of the ITAA 1936 operates so that where the trustee of a non-resident 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 taxpayer is required to complete the section 102AAM calculation and include the amount on an additional information schedule when lodging the relevant income tax return. The ATO will confirm the calculation and the amount payable.