Edited version of private advice

Authorisation Number: 1052030617173

Date of advice: 28 October 2022

Ruling

Subject: Foreign fund

Question 1

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

Answer

No.

Question 2

Will any part of the amount withdrawn from the Fund be assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 3

Will you be liable for additional tax under section 102AAM of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

Relevant facts and circumstances

You became a resident of Australia for taxation purposes.

You currently hold an interest in the overseas fund (the Fund).

The Fund is located in Country A and is a Provident Fund.

The governing rules of the Fund provide that on the termination of employment a member, other than on death or retirement, shall become entitled to their benefits.

You have ceased employment with your foreign employer.

During the year ending 30 June 20XX, you intend to withdraw your total benefits as a lump sum payment.

Detailed reasoning

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.

In this case, the Fund 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 their retirement age of 55.

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.

Receipt of trust income not previously subject to tax in Australia

Where a foreign fund does not meet the definition of a foreign superannuation fund, a distribution from the fund is subject to section 99B of the ITAA 1936.

Broadly, section 99B of the ITAA 1936 deals with the receipt of trust amounts that have not previously been subject to tax in Australia. It applies where an Australian resident for tax purposes receives a lump sum payment from a foreign trust.

Subsection 99B(1) of the ITAA 1936 provides that where a beneficiary who was an Australian resident at any time during an income year is paid an amount 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 in the income year it is paid.

However, subsection 99B(2) of the ITAA 1936 reduces the amount to be included in assessable income under subsection 99B(1) by so much of that amount as represents:

a) corpus of the trust, (but not 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 are or have been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or that are 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, amounts included under the transferor trust measures for a taxpayer having transferred property or services).

In your case, you have received an amount that represents the corpus of the trust. The amount that represents corpus includes amounts previously deposited to the Fund. Amounts that represent earnings of the fund are not corpus. Therefore, paragraph 99B(2)(a) of the ITAA 1936 applies to you so that:

a)    the proportion of the withdrawal that represents amounts previously deposited to the Fund by you or your employer is excluded from your assessable income, and

b)    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 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.

Interest charge on distributions of accumulated trust income

If section 99B of the ITAA 1936 includes a distribution of accumulated income from a non-resident trust estate in your assessable income, you may be liable to pay additional tax in the nature of an interest charge on the distribution.

The interest charge may apply to a distribution of profits from a non-resident trust estate to the extent the distribution was made from profits that:

a)    are referable to eligible designated concession income derived in an income year when the trust was a resident of a listed country, or

b)    were not subject to tax in a listed country and were derived in an income year when the trust was a resident of an unlisted country.

Country A is an unlisted country.

You are required to complete the section 102AAM calculation and include the amount on an additional information schedule when lodging the relevant income tax return. After you lodge, the ATO will confirm that calculation and the amount payable.