Edited version of private advice

Authorisation Number: 1052076312753

Date of advice: 12 January 2023

Ruling

Subject: Foreign trust distribution

Question 1

Is the amount you received from the foreign provident fund (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 Fund assessable under section 99B of 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

You became a member of the Fund while you were a foreign resident.

The Fund was established and managed in a foreign country.

Members of the Fund could make a once-off cash withdrawal of all or part of their benefit prior to retirement age of 55 in accordance with the Fund's rules.

You subsequently relocated to Australia and became a resident of Australia for taxation purposes.

You did not make any contributions to the Fund after becoming a tax resident of Australia.

You withdrew the balance from your account with the Fund after you became a tax resident.

Foreign tax was deducted from the withdrawal.

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 62

Superannuation Industry (Supervision) Regulations 1994

Reasons for decision

Issue 1

Foreign superannuation fund

Question

Is the amount you received from the Fund a superannuation lump sum for the purposes of section 305-70 of the ITAA 1997?

Summary

No. The Fund is not a foreign superannuation fund; therefore, the amount you received is not a superannuation lump sum and section 305-70 of the ITAA 1997 does not apply.

Detailed reasoning

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.

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 funds 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.

Subsection 995-1(1) of the ITAA 1997, defines a 'superannuation fund' as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), that is:

(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.

There is no definition for the phrase 'provident, benefit, superannuation or retirement fund' in either the ITAA 1997, the ITAA 1936 or the SISA. However, the phrase provident, benefit and superannuation fund established for the benefit of employees was considered by Justice Kitto of the High Court in Mahony v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

Justice Kitto referred to each of the 3 terms separately and said:

Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words provident, benefit and superannuation must be taken to have connoted a purpose narrower than the purpose of conferring benefits in a completely general sense, upon employees. All that need to be recognised is that just as provident and superannuation both referred to the provision of a particular kind of benefit so benefit must have meant a benefit, not in the general sense, but characterised by some specific future purpose.

Justice Kitto in Mahony referred to superannuation as the making of provision for financial support for an employee, or for the employee's estate or dependants, to arise on the employee's retirement, death or other cessation of employment (for example, termination or resignation).

Furthermore, the view that a superannuation fund needs to be for exclusive purposes is highlighted in Justice Kitto's judgement that the fund did not satisfy any of the 3 provisions, that is, provident, benefit or superannuation fund, as there existed provisions for the payment of benefits for any other reason whatsoever. In other words, though the fund contained provisions for retirement purposes, it could not be accepted as a superannuation fund in that it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

The view that a superannuation fund should be established for the sole purpose of providing superannuation benefits on retirement is also supported in the High Court decision Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v. Federal Commissioner of Taxation (No 2) (1966) 10 AITR 290; (1966) 14 ATD 333; 40 ALJR 265 (Scott). Justice Windeyer said:

... 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.

The Commissioner of Taxation's view is that a fund, to be classified as a superannuation fund, 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 or death of the individual or as specified under the SISA.

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 following events occur:

(i)            on or after retirement from gainful employment; or

(ii)           attaining a prescribed age; and

(iii)          on the members death. (This may require the benefits being passed on to a members dependant or legal representative.)

Provided a regulated superannuation fund is maintained for one or more of the core purposes, section 62 of the SISA also allows a superannuation fund to provide benefits for 'ancillary purposes'. 'Ancillary purposes' cover 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. As indicated, 'ancillary purposes' does not relate to general or non-retirement purposes such as education, home purchases, medical expenses et cetera.

In this case, the Fund satisfies some of the requirements of a foreign superannuation fund as it is established outside of Australia and the central management and control is outside of Australia. However, the Fund is not exclusively a provident, benefit or superannuation fund because it does not provide benefits only for the specific future purposes of the individual's retirement. Members can make a once-off cash withdrawal of all or part of their benefit prior to retirement age of 55 in accordance with the Fund's rules. The Fund is not a bona fide superannuation fund because its sole purpose is not to provide benefits upon death, invalidity or retirement.

Therefore, the payment from the Fund is not assessable under subsection 305-70(2) of the ITAA 1997 as it is considered that the payment is not being made from a foreign superannuation fund.

Issue 2

Foreign trust income

Question

Is any part of the amount you received from the Fund assessable under section 99B of the ITAA 1936?

Summary

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

Detailed reasoning

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 corpus and earnings of a trust. The amount that represents corpus includes amounts previously deposited to the Fund by you and/or your employer. 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 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.

Please note that the date of acquiring Australian tax residency is not relevant for the purposes of determining the amount of fund earnings assessable under section 99B of the ITAA 1936.

Additional information

Section 102AAM interest charge

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 is specified in section 102AAM of the ITAA 1936.

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.

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.

For further information about how to do this calculation see page 87 of the 'Foreign income return form guide' available at www.ato.gov.au by searching for QC 66597. Alternatively, search for ATO QC 66597 via Google or another search engine. After you lodge, the ATO will confirm that calculation and the amount payable.