Edited version of private advice

Authorisation Number: 1052051664174

Date of advice: 27 October 2022

Ruling

Subject: Taxation of amount received from a foreign trust

Question 1

Is the amount you received from the Foreign Provident Fund a 'superannuation lump sum' 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 amount you received from the Foreign Provident Fund assessable under section 99B of Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were a member of the Foreign Fund from 200X.

You and your employers made contributions to the fund, as required by law.

The fund invested your contributions and announced annual dividends depending on how the investments performed. These were also paid into the fund.

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

You became an Australian citizen in 20XX.

Your application was approved.

You received AUD XX,XXX in December 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1997 subsection 295-95(2)

Income Tax Assessment Act 1997 subsection 305-70(2)

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

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Superannuation Industry (Supervision) Regulations 1994

Reasons for decision

Superannuation lump sum

Meaning of 'foreign superannuation fund'

A 'foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 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.

Relevantly, 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 at that time; 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 member covered by subsection (3) (an active member) 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.

Thus, 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.

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 provides that:

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 fundand 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' such as the example given by Justice Kitto of a funeral benefit.

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.

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

In this case, information available indicates the Foreign Fund allows for withdrawals prior to retirement when the individual ceases to be a citizen of first mentioned jurisdiction.

Because the benefits in the Foreign Fund can be withdrawn for purposes other than retirement, the Foreign Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

Accordingly, the Foreign Fund does not fall within the definition of a 'foreign superannuation fund' and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance.

Foreign trust income

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 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 a distribution from a trust 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 include 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 and 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 hat 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.