Edited version of private advice

Authorisation Number: 1051953201525

Date of advice: 2 March 2022

Ruling

Subject: Foreign fund transfer

Question 1

Is the overseas retirement plan a 'foreign superannuation fund' as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the lump sum payments received from the overseas fund be included in your assessable income?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer is an Australian Citizen and is currently a tax resident of Australia and was a tax resident of Australia during 20XX.

The Taxpayer was a non-resident of Australia for tax purposes from August 20XX to 30 June 20XX.

From August 20XX until 30 June 20XX the Taxpayer lived and worked abroad and during that time worked for the same employer.

While employed with the Taxpayer participated in the companies Retirement Plan (Retirement Plan).

The retirement plan is constituted within an offshore Trust based in XXXX.

The Taxpayer has received two lump sum payments from this Retirement Plan in the Australian tax year ended 30 June 20XX.

Under the retirement plan, employer contributions have been made to the plan by the employer from the Taxpayers salary. This is equal to approximately 10% of the Taxpayers base pay.

Under the Retirement Plan, participants are able to withdraw amounts at the time they terminate employment with the employer and before retirement age. The handbook states the following at page 41:

Members who have left service have the following options for receipt of their account balances when taking payment from their plan:

•                     single lump sum payment - one-time cash payment of the total value of your retirement account.

•                     Designated initial lump sum payment with remaining balance paid out in equal annual instalments (minimum 2 and maximum 10 total payments); or

•                     Equal annual instalments (minimum 2 and maximum 10 total payments).

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99B

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 305-55

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

Superannuation Industry (Supervision) Act 1993 Subsection 10(1)

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Question 1

Summary

The fund is not a foreign superannuation fund as per subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Lump sum payments received from certain foreign superannuation funds

1. Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation lump sum benefits paid from foreign superannuation funds and other foreign schemes for the payment of similar retirement or death benefits, as defined in section 305-55 of the ITAA 1997.

2. Before determining whether an amount is assessable income under subdivision 305-B of the ITAA 1997, it is necessary to determine whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund (or scheme for the payment of superannuation benefits), Subdivision 305-B will not apply to the payment.

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:

A superannuation fund is a foreign superannuation fund at a time or for an income year if the fund is not an Australian superannuation fund at that time or for that 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; 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 active members 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 under subsection 295-95(2) must be satisfied at the same time. If a fund fails to satisfy one of the above tests at a particular time, it is not an Australian 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. The fact that some of its members may be Australian residents would not necessarily alter this.

Section 305-55 of the ITAA 1997 also provides for a lump sum benefit payment (that is not a pension payment) made from a foreign retirement scheme (that provides retirement benefits 'in the nature of superannuation') to receive the same tax treatment as a superannuation lump sum paid from a foreign superannuation fund. However, the conditions in Subsection 305-55(2) must be met, including:

•         the scheme was not established in Australia; and

•         the scheme is not centrally managed or controlled in Australia.

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 defines a superannuation fund as:

•         a fund that is:

                                     i.        an indefinitely continuing fund; and

                                    ii.        a provident, benefit, superannuation or retirement fund; or

•         a public sector superannuation scheme.

Meaning of 'provident, 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 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 indicated 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 FC of T 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.

In paragraph 62(1)(a) of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member only when one of the following events occurs:

•         on or after retirement from gainful employment

•         attaining a prescribed retirement age

•         the member dies (which may require the benefits to be passed on to the member's dependants or legal representative).

The SISA and the Superannuation Industry (Supervision) Regulations 1994 (SISR) provide guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. This guidance is still relevant to understanding the purpose of foreign superannuation funds, even though the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA) that are established in Australia and operate in Australia.

In view of the legislation and decisions made in the Scott and Baker cases, a fund can only be classified as a superannuation fund if it exclusively provides benefits for the purpose of payment upon the member's retirement, invalidity or death, or as otherwise specified under the SISA and SISR.

A foreign retirement fund is not a superannuation fund for Australian income tax purposes if the fund allows for withdrawals for pre-retirement purposes, such as education, medical expenses or housing costs.

In this case, the Retirement Plan Handbook states that 'members who have left service have three options for receipt of their account balances when taking payment from their plan. To receive the money they do not have to be retired.

As the benefits in the fund are not paid only for retirement purposes, the fund does not meet the 'sole purpose test' and therefore is not a 'superannuation fund' for Australian income tax purposes.

Therefore, a lump sum paid from this fund is not from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Consequently, Subdivision 305-B of the ITAA 1997 does not apply to any lump sum payments that you received from the Fund.

Question 2

Summary

Income that is withdrawn from the Retirement Plan is similar to a distribution from a trust with any amounts distributed (withdrawn) or credited from your account being assessable under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) less any amounts excluded under subsection 99B(2).

Detailed reasoning

Assessability of trust income

Section 6-10 of theITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 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.

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, the 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) 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:

•         the corpus of the included in the beneficiary's income 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), and

•         amounts previously under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936).

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).

In this case, you received two lump sums from the Retirement Plan, at the time of the withdrawals it is deemed that income has been paid to you or applied for your benefit. Therefore, withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from the Retirement Plan are assessable under subsection 99B(1) of the ITAA 1936 less any amounts that would fall under subsection 99B(2).