Edited version of private advice

Authorisation Number: 1051998212866

Date of advice: 1 July 2022

Ruling

Subject: Payment from a foreign entity

Question 1

Is any part of the lump sum benefits paid from a foreign fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is any part of the lump sum withdrawal from a foreign fund assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The Taxpayer is a resident of Australia for taxation purposes.

2.    The Taxpayer was employed overseas.

3.    The Taxpayer was a member of a foreign trust.

4.    Both the Taxpayer and their employer made contributions to the foreign trust.

5.    The Taxpayer requested a lump sum withdrawal from the foreign trust upon cessation of employment.

6.    The Taxpayer's withdrawal request was made in the 20XX-XX income year, the Taxpayer did not make any withdrawal requests prior to this.

7.    The funds were transferred to the Taxpayer's Australian bank account directly from the foreign trust in the 20XX-XX income year.

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 305-70

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

Income Tax Assessment Act 1936 section 99B

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Summary

1.    No part of the lump sum benefits paid from the foreign trust is assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997.

2.    Part of the lump sum withdrawal from the foreign trust assessable income under section 99B of the Income Tax Assessment Act 1936.

Detailed reasoning

Question 1

Meaning of 'provident, benefit, superannuation or retirement fund'

3.    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:

4.    ...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.

5.    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.

6.    Furthermore, Justice Kitto's judgment 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.

7.    In section 62 of the Superannuation Industry (Supervision) Act 1993 (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).

8.    Though section 62 of the SISA also allows a superannuation fund to provide benefits for ancillary purposes, such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses.

9.    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 its regulations) as providing guidance as to what benefit or specific future purpose a superannuation fund should provide.

10.  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.

Taxation of funds received from a foreign superannuation fund

11.  The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received more than six months after a person has become an Australian resident, will be assessable under subdivision 305-B of the ITAA 1997, in particular section 305-70 of the ITAA 1997.

12.  The applicable fund earnings are subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

13.  The applicable fund earnings is the amount worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

14.  Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund, then Subdivision 305-B of the ITAA 1997 will not have any application.

15.  The foreign trust allows members to access their benefits (or a percentage of their benefits) upon termination from employment under certain conditions, to acquire housing and emigration. It follows that the foreign trust is not a 'superannuation fund' so, it cannot be a 'foreign superannuation fund'. Consequently, section 305-70 of the ITAA 1997 does not apply to the lump sum received by the Taxpayer.

Question 2

Assessability of trust income

16.  Subsection 6-5(2) of the ITAA 1997 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.

17.  Subsection 6-10(4) of the ITAA 1997 states that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia.

18.  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. Sections 4 and 5 of the International Tax Agreements Act 1953 (Agreements Act) incorporate that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law.

19.  The relevant agreement (the Agreement) can be located on the Australian Treaty Series website.

20.  The Agreement operates to avoid the double taxation of income received by Australian and the country in question.

21.  Article 18 of the Agreement deals with pensions and annuities which are usually paid as an income stream. In this case, the Taxpayer received a lump sum payment from the foreign fund which is not considered to be a pension or annuity.

22.  The Agreement does not contain any articles that specifically relate to the receipt of funds from a foreign retirement or investment fund, so Article 21 concerning 'Income not expressly mentioned' will apply.

23.  Paragraphs (1) and (2) of Article 21 provide that income of a resident of one of the States which is not dealt with in the foregoing Articles of the Agreement will be taxable only in the State of residency. However, if such income is derived by a resident of one of the States from sources in the other State, such income may also be taxed in the State in which it has its source.

24.  Therefore, the Agreement allows both Australia and the country in question to tax any withdrawals made from the foreign trust.

25.  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 305-70 of the ITAA 1997 and section 99B of the ITAA 1936.

26.  The foreign trust does not meet the definition of a 'foreign superannuation fund' under subsection 995-1(1) of the ITAA 1997. Therefore, it is a foreign trust estate for which section 99B of the ITAA 1936 would apply to tax distributions made to, or for the benefit of, resident beneficiaries.

27.  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.

28.  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.

29.  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.

30.  In this case, as the Taxpayer is a resident of Australia for taxation purposes, the Taxpayer will need to include in their assessable income all amounts paid to them, or applied for your benefit, from the foreign fund, subject to the exclusion contained in subsection 99B(2) of the ITAA 1936.