Edited version of private advice

Authorisation Number: 1052056791054

Date of advice: 3 March 2023

Ruling

Subject: Lump sum payment from a foreign pension fund

Question 1

Is the pension fund (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

Does subdivision 305-B of the ITAA 1997 apply to the lump sum paid from the Fund?

Answer:

No.

Question 3

Is any part of the amount you received from the Fund, assessable under section 99B of the Income tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This private ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The taxpayer became a resident of Australia for taxation purposes in 20XX.

The taxpayer became entitled to a gratuity from an overseas Fund.

The Fund allows for a member who resigns from his or her employer's service to have their benefits paid as a once-off cash lump sum to their bank account.

In 20XX, a gratuity was paid by the Fund to the individual's Australian personal bank account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

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

Income Tax Assessment Act 1936 section 99B

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Question 1

Summary

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

Detailed reasoning

Meaning of 'foreign superannuation fund'

Lump sum payments received from foreign superannuation funds are assessable under Subdivision 305-B of the ITAA 1997.

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'.

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 the withdrawal of benefits for termination of employment, medical schemes, housing plans, loans and rental assistance.

Section 3 of the GEP Law 1996 states that the object of the Fund shall be to provide the pensions and certain other related benefits.

Schedule 1 rule 14 of the GEP Law 1996 allows for a member who resigns from his or her employer's service to have their benefits paid as a once-off cash lump sum to their bank account.

The GEPF 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, GEPF provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

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

Question 2

Summary

As the lump sum payment from GEPF is not from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997, subdivision 305-B of the 1997 will not apply to the payment.

Detailed reasoning

Lump sum payments received from certain foreign superannuation funds

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.

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.

Consequently, Subdivision 305-B of the ITAA 1997 does not apply to the payment that you received from GEPF.

Question 3

Summary

GEPF is considered a foreign trust and the amount paid to you will be subject to tax under section 99B of the ITAA 1936.

Detailed reasoning

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.

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);

b) amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer;

ba) an amount that is non-assessable non-exempt income of the beneficiary because of section 802-17 of the Income Tax Assessment Act 1997;

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).

e) if the beneficiary is a company - an amount that is or has been included in the assessable income of the beneficiary under section 102AAZ.

The amount that represents corpus includes amounts previously deposited into GEPF. Amounts that represent earnings of the fund are not corpus. Therefore, paragraph 99B(2)(a) of the ITAA 1936 applies to you so that:

•         the proportion of the withdrawal that represents amounts previously deposited into GEPF by you and your employer is excluded from your assessable income, and

•         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.