Edited version of private advice

Authorisation Number: 1051995133488

Date of advice: 20 June 2022

Ruling

Subject: Foreign fund transfer

Question 1

Is the overseas fund a foreign superannuation fund for the purposes of section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is any part of the lump sum benefit applicable fund earnings under section 305-70 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

While working in South Africa you became a member of the Fund.

You became an Australian resident for tax purposes in 20XX.

You withdrew your total benefits from the Fund during the 20XX-XX income year.

The Rules of the Fund state that:

•         Normal retirement age means the age of 65 years old or such later age.

•         Members may choose to resign and retire at an age earlier than normal retirement date. From the age of 55, members may choose to retire with the approval of the employer.

•         If a member's service is terminated before their normal retirement date, the member may choose to withdraw 100% of their benefits as a lump sum payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

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

Income Tax Assessment Act 1936 section 99B

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

Case Law

Scott v Commissioner of Taxation of the Commonwealth (No.2) (1966) 10 AITR 290; (1966) ALJR 265; (1966) 14 ATD 333Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519

Reasons for Decision

Foreign superannuation fund definition

Section 305-70 of the ITAA 1997 provides that where you receive a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, you include the 'applicable fund earnings' of the lump sum (if any) in your assessable income. Applicable fund earnings are worked out under section 305-75 of the ITAA 1997.

If the entity making the lump sum payment is not a foreign superannuation fund then section 305-70 of the ITAA 1997 will not have any application.

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as being a fund that is not an Australian superannuation fund. A superannuation fund has the meaning given by subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SISA), which requires that the fund is a 'provident, benefit, superannuation or retirement fund'.

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No.2) (1966) 10 AITR 290; (1966) 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 benefits of its employees except that it must be 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'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 section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for 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).

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.

South African retirement annuity funds are governed by the Income Tax Act 58 of 1962 and the Pension Funds Act No.24 1956. Access to the benefits in a retirement annuity is strictly legislated and is only accessible upon the legislative age of retirement of 55, death and invalidity.

In this case, your Fund is a Provident fund that allows an existing member to withdraw up to 100% of their benefits on the termination of employment. The termination of employment may occur prior to obtaining a member's retirement age of 65, or the age of 55 with employer permission.

The Fund satisfies some of the requirements of a foreign superannuation fund, however the Fund is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purposes of the individual's retirement. Members can withdraw benefits prior to retirement age. In other words, the Fund provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

Accordingly, any payments from the Fund will not be a payment from a foreign superannuation fund and section 305-70 of the ITAA 1997 will not have any application in this instance. The payment will instead be assessable to the you under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936).

Other relevant comments

Receipt of trust income not previously subject to tax in Australia

A fund in the nature of a retirement or investment plan/fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder.

Section 99B of the ITAA 1936 deals with the receipt of trust income 'not previously subject to tax' in Australia and applies where an Australian resident taxpayer receives a lump sum payment from a foreign retirement or investment fund. Section 99B takes precedence over section 97 of the ITAA 1936 in assessing these types of payments.

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 does not 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 (personal and employer contributions) returned to them. Any earnings in the funds are only assessable in Australia on withdrawal from the funds.