Edited version of private advice

Authorisation Number: 1051944051591

Date of advice: 23 June 2022

Ruling

Subject: Lump sum payment from foreign fund

Question 1

Is either Fund A or Fund B a foreign superannuation fund for the purposes of Subdivision 305-B of the Income Tax Assessment Act 1997? (ITAA 1997)

Answer

No.

Question 2

Does the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the US Convention) apply to you?

Answer

Yes.

Question 3

For each of Fund A or Fund B, does Article 18 of the US Convention concerning pensions and annuities apply to lump sum withdrawals from the plan?

Answer

No.

Question 4

For each of Fund A or Fund B, does Article 21 of the US Convention concerning 'Other income' apply to lump sum withdrawals from the plan?

Answer

Yes.

Question 5

Is any part of the lump sum withdrawals from Fund A or Fund B assessable as income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 6

For each of Fund A or Fund B are both employee and employer contributions considered part of the corpus and therefore excluded from assessable income under subsection 99B(2) of the ITAA 1936?

Answer

Yes.

Question 7

For each of Fund A or Fund B, are the annual earnings which are accumulated in your accounts assessable income in the year that the annual earnings are accumulated?

Answer

No.

Question 8

If the answer to question.7 is 'yes', do the annual earnings become part of the corpus of the plan so are excluded from assessable income under subsection 99B(2) of the ITAA 1936?

Answer

Not applicable.

Question 9

Can you use the exchange rate valid on the day of the withdrawal to convert the assessable portion from US dollars (USD) to Australian dollars (AUD)?

Answer

Yes.

Question 10

For each of Fund A or Fund B, is the non-assessable part of a withdrawal considered target foreign income?

Answer

Yes.

Question 11

If the answer to the previous question is 'yes', in the 20XX income year is the target foreign income from the US to be converted to AUD at the exchange rate of 0.7353?

Answer

Not applicable.

Question 12

Are you entitled to a foreign income tax offset (FITO) for the US 'early withdrawal penalty' and any other U.S. state and local taxes paid on the withdrawal?

Answer

Yes, to the extent the tax is payable in respect of the assessable amount of the withdrawal.

Question 13

Are you entitled to a FITO for the US taxes paid on the part of the withdrawal corresponding to:

(a) employer contributions to the plan?

(b) employee contributions to the plan?

(c) annual earnings accumulated in your account that are, or were, assessable in Australia in the current or previous tax year?

(d) any other amounts?

Answer

(a) No.

(b) No.

(c) Not applicable, as annual earnings are not assessable when accumulated.

(d) Yes, to the extent the tax is payable in respect of the assessable amount.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed by a foreign employer, for almost XX years before you moved to Australia.

You are a member of Fund A.

You have provided a Plan Description of Fund A, summarising the important features of the Plan including your benefits and obligations under the Plan.

You are also a member of Fund B.

You have provided a plan description for Fund B.

You have been a resident of Australia for tax purposes since the 20XX-XX income year.

You are a non-resident alien for US tax purposes.

All employer and employee contributions to Fund A and Fund B were made prior to you becoming a permanent visa holder of Australia.

Earnings, being dividends and gains, on the investments in your accounts are added to your account periodically and reinvested. The earnings are not distributed to you and then paid back into the plans to be reinvested.

In the 20XX-XX income year earnings from Fund A and Fund B were added to your accounts in those Funds.

In the 20XX-XX income year earnings from Fund A and Fund B were added to your accounts in those Funds.

In the 20XX-XX income year earnings from Fund A and Fund B were added to your accounts in those Funds.

In the 20XX-XX and 20XX-XX income year you made lump sum withdrawals from Fund A and Fund B. US Federal tax was withheld from the withdrawals.

In the 20XX-XX income year earnings from Fund A and Fund B were added to your accounts in those Funds

All the withdrawals were made into a USD denominated checking account. You did not (immediately) transfer the withdrawals to an Australian dollar (AUD) denominated account.

You incurred an "early withdrawal penalty" as a 10% additional tax on early distributions.

You filed a US Federal Income tax return in the 20XX-XX income year and received a refund for the tax paid on the combined withdrawals.

You intend to make further withdrawals from both Fund A and Fund B in the current income year and possibly the next income year.

You are less than XX years old.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6 5(2)

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 Subdivision 305 B

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Section 960-50

Income Tax Assessment Act 1936 Section 99B

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

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 62

A New Tax System (Family Assistance) Act 1999 section 5 of Schedule 3

Social Security Act 1991 Subsection 8(1)

Social Security Act 1991 Section 10A

International Tax Agreements Act 1953

Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income

All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

Fund A and Fund B are not foreign superannuation funds for the purposes of Subdivision 305-B.

Detailed reasoning

Question 1

Foreign superannuation fund

A foreign superannuation fund is defined in subsection 995-1(1) 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.

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

Under the definition of Australian superannuation fund in subsection 295-95(2), 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.

Superannuation fund

'Superannuation fund' is defined in subsection 995-1(1) as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

In accordance with subsection 10(1) of the SISA, 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'.

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.

A similar approach was adopted by Taylor J and Windeyer J who said:

It thus becomes necessary to look carefully and critically at the terms of the trust deed, at what is required and what is permitted - that is to say in what ways the trustees might, without any breach of the trusts it imposes, apply the trust property.

...In other words, if they could, keeping within the terms of the trust, apply the fund or any portion thereof to purposes foreign to the true purposes of such a fund, then it would not be such a fund.

Senior Member O'Loughlin in Baker v FC of T 2015 ATC 10-399; (2015) AATA 469 (Baker) stated,

... 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.

In section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for one or more of 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 that 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.

The information provided indicates that benefits can be withdrawn from Fund A while still employed provided certain conditions are met. While, after terminating employment with the employer, irrespective of age and whether you have retired, you are generally able to withdraw your benefits.

Fund B similarly allows for some withdrawals to be made while still employed with the employer. Fund B also allows for withdrawals to be made after terminating employment with the employer irrespective of age and whether you have retired.

The payment of benefits in such circumstances is not in the nature of superannuation styled benefits permitted under the SISA, and neither Fund A or Fund B are maintained solely for one or more of the core purposes outlined in the SISA.

You raised the fact that recent Australian legislative changes allow for the withdrawal for non-retirement purposes and this appears to invalidate the 'sole purpose argument'. The sole purpose of providing retirement benefits to members, within a controlled structure remains and has not changed.

In Baker Senior Member O'Loughlin made note of the similarities between the retirement savings regimes in the USA and Australia. This would extend to the legislature in each country allowing the benefits to be accessed or withdrawn for ancillary or other purposes.

However, Senior Member O'Loughlin recognised there were fundamental differences between the savings regimes and in particular the rules in Australia generally requiring benefits to be preserved until retirement.

There is no such legislative requirement in the USA for benefits to be preserved until retirement. Nor is there a requirement in Fund A or Fund B for benefits to be preserved until retirement. It is because of these differences Fund A and Fund B do not meet the definition of a superannuation fund.

Furthermore, neither Fund A or Fund B is a scheme for the payment of benefits in the nature of superannuation on retirement or death.

Therefore, Fund A and Fund B are not foreign superannuation funds for the purposes of Subdivision 305-B.

Questions 2 - 4

Subsection 6-5(2) 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.

In determining liability to tax on foreign 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 2 to the Agreements Act contains the US Convention. The US Convention operates to avoid the double taxation of income received by Australian and US residents.

In your case, as you are a resident of Australia for the purposes of the US Convention and have received an amount of income from an entity based in the US, the US Convention applies to you in respect of that income.

Article 18 of the US Convention deals with pensions and annuities which are usually paid as an income stream. In your case, you received, and will receive, lump sum payments from the US plans which are not considered to be a pension or annuity.

The US Convention does not contain any articles that specifically relate to the receipt of funds from a foreign retirement or investment fund, so Article 21 concerning 'Other income' will apply.

Paragraphs (1) and (3) of Article 21 (as amended in 2003) provide that income of a resident of one of the countries which is not dealt with in the foregoing Articles of the Convention will be taxable only in the country of residency. However, if such income is derived by a resident of one of the countries from sources in the other country, such income may also be taxed in the country in which it has its source.

Therefore, the US Convention allows both Australia and the US to tax any withdrawals made from Fund A and Fund B.

Question 5

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

Section 10-5 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the ITAA 1936.

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

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.

In your case, as you are a resident of Australia for taxation purposes, you will need to include in your assessable income all amounts paid to you, or applied for your benefit, from the plans, subject to the exclusion contained in subsection 99B(2) of the ITAA 1936.

Question 6

The term 'corpus' is not defined in the legislation; therefore, it takes the ordinary meaning of the term. The Macquarie Dictionary (Online edition 2019) defines 'corpus' to mean a 'principal or capital sum, as opposed to interest or income'.

As discussed in question 5, the assessable amount under section 99B of the ITAA 1936 is the total amount received less any amounts deposited to the fund (the corpus) by the taxpayer, or on their behalf.

Accordingly, for each of Fund A and Fund B, both employer and employee contributions are considered part of the corpus and therefore excluded from assessable income under subsection 99B(2) of the ITAA 1936.

Questions 7 and 8

Earnings on your investments within the Funds were, and are, automatically reinvested and added to your accounts in the Funds.

ATO Interpretation Decision ATO ID 2011/93 Income Tax: Application of section 99B of the Income Tax Assessment Act 1936 when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income provides the Commissioner's view of the operation of section 99B of the ITAA 1936 in respect of the receipt of an amount that comprised solely of foreign interest income.

The Commissioner's view is that the entire amount of the payment is included in the beneficiary's assessable income under subsection 99B(1) of the ITAA 1936 because:

•         The conditions in subsection 99B(1) of the ITAA 1936 are satisfied as the taxpayer has received an amount of trust property during an income year in which the taxpayer was a resident;

•         Trust property paid to the resident beneficiary is attributable to foreign source interest derived by the trust. As interest income would have been assessable had it been derived by a resident taxpayer, and as the interest income has not been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, none of the exclusions in subsection 99B(2) of the ITAA 1936 applies to reduce the amount included in the assessable income of the beneficiary.

•         It is clear from the language of section 99B of the ITAA 1936, and by inference from subsection 102AAM(5) of the ITAA 1936, that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust. Rather, the only explicit condition concerning residency is that the beneficiary be a resident at some time during the year of income in which the trust property is paid to them or applied for their benefit.

In your case, the earnings have been added to your accounts in the Funds. The earnings are not assessable income in the year they are added to your account; they are assessable under section 99B of the ITAA 1936 when you make withdrawals.

Question 9

As an Australian resident, you will have to use the Australian dollar value (AUD) to work out your tax liability (subsection 960-50(1)).

Subsection 960-50(6) includes a table that contains the particular time at which particular types of amounts denominated in a foreign currency are translated into Australian currency.

Item 7 (statutory income other than capital gains or losses) provides the timing of translating to AUD, is the earlier of the time it is first required to be included in assessable income and the time of receipt.

Accordingly, you can use the exchange rate valid on the day of the withdrawal to convert the assessable portion from USD to AUD.

Links to a list of available exchange rates can be found on ato.gov.au by searching for Foreign exchange rates or typing QC 16583 in the search box.

From 1 January 2020, we have used the exchange rates from the Reserve Bank of Australia.

Question 10

Target foreign income (TFI) is an element in the calculation of adjusted taxable income (ATI) which is used for determining eligibility for concessions and benefits, so the purpose of TFI is to include foreign economic benefits enjoyed by the individual.

TFI is defined in section 5 of Schedule 3 to A New Tax System (Family Assistance) Act 1999.

Under paragraph (a) of the definition, TFI is the amount of the individual's foreign income (as defined in section 10A of the Social Security Act 1991) for the income year that is neither taxable income nor a fringe benefit.

Under paragraph (b), TFI also includes any amount that is not covered by paragraph (a) that is exempt from tax under section 23AF or 23AG of the ITAA 1936.

Section 10A of the Social Security Act 1991 (SSA 1991) provides that "foreign income", in relation to a person, means:

(a)  an income amount earned, derived or received by the person from a source outside Australia for the person's own use or benefit; or

(b)  a periodical payment by way of gift or allowance from a source outside Australia; or

(c)   a periodical benefit by way of gift or allowance from a source outside Australia.

In relation to paragraph 10A(a) of the SSA 1991, subsection 8(1) of the SSA 1991 states that 'income amount' means:

(a)  valuable consideration; or

(b)  personal earnings; or

(c)   moneys; or

(d)  profits;

(whether of a capital nature or not).

In your case, sections 23AF or 23AG would not apply to you, so we are only concerned with paragraph(a) of the definition.

You received, and will receive, lump sum withdrawals from Fund A and Fund B for your own use and benefit. Therefore, the non-assessable part of a withdrawal is considered TFI under paragraph 10A(a) of the SSA 1991.

Question 11

The Commissioner does not generally provide private rulings on which exchange rate to use, and we have addressed this aspect at Question 9.

Questions 12 and 13

Section 770-10 provides that a FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains. The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

You state that the Internal Revenue Code Section 72(t) describes the 'early withdrawal penalty' as a 10% additional tax on early distributions.

If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for the income year, only a proportionate share of the foreign income tax paid (the share that corresponds to the part that is assessable income) will count towards the tax offset.

Article 22 (paragraph (2)) of the US Convention provides that Australia will allow a credit for US tax (other than US tax imposed solely by reason of citizenship or by an election by an individual under US domestic law to be taxed as a resident of the US) on income derived by a resident of Australia from sources in the US.

In your case, you will be entitled to claim a FITO that corresponds to the foreign tax paid on the proportion of the withdrawals from Fund A and Fund B that are included in your assessable income.