Edited version of private advice

Authorisation Number: 1052076327630

Date of advice: 12 January 2023

Ruling

Subject: Superannuation - trust income

Issue 1 Foreign superannuation fund

Question 1

Is the amount you received from the fund a 'superannuation lump sum' for the purposes of sections 305-70 and 305-75 of the Income Tax Assessment Act 1997?

Answer

No.

Issue 2 Foreign trust income

Question 2

Is part of the amount you received from the fund assessable under section 99B of the Income Tax Assessment Act 1936?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

XX/XX/20XX

Relevant facts and circumstances

You moved to Country X to work for a Country X employer.

You commenced paying into a fund with your Country X employer in XX/20XX, ending with a final contribution in XX/20XX prior to your return to Australia.

Both you and your Country X employer made contributions to the fund.

You arrived back in Australia on XX/XX/20XX on which date you became a resident of Australia for tax purposes again.

Subsequently, you withdrew the entire amount from the fund as a lump sum on XX/XX/20XX.

Prior to receiving payment, Country X tax was withheld at the rate of XX% on the whole amount of the withdrawal.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1936 section 99B

Reasons for decision

Issue

Foreign superannuation fund

Question

Is the amount you received from the fund a 'superannuation lump sum' for the purposes of sections 305-70 and 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

No. The fund is not a foreign superannuation fund; therefore, the amount you received is not a 'superannuation lump sum' and sections 305-70 and 305-75 of the ITAA 1997 do not apply.

Detailed reasoning

When a person receives a lump sum from a foreign superannuation fund more than 6 months after they became an Australian resident, the growth they earned on their foreign superannuation during the period when they were a resident of Australia is included in their assessable income as 'applicable fund earnings' under sections 305-70 and 305-75 of the ITAA 1997. To be eligible, the paying fund must meet the definition of a foreign superannuation fund.

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'.

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.

Some foreign pension plans allow members to withdraw benefits for termination of employment, medical schemes, housing plans, leaving the country permanently, loans and rental assistance. In general, these provisions do not provide benefits for the specific future purposes of the individual's retirement.

The type of fund in question from Country X allow for withdrawals for housing, college tuition and other hardship scenarios. Therefore, they do not meet the definition of a foreign superannuation fund and the applicable fund earnings calculation does not apply to a payment or transfer from these funds.

Issue

Foreign trust income

Question

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

Summary

Yes. The fund 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

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 by you and your employer 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 by you and your employer 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.

To summarise, the amount included in your assessable income in the income year it is paid to you is the gross amount withdrawn before Country X tax was withheld minus the total contributed by you and your employer. In other words, the amount included in your assessable income is the total earnings of the fund over its whole life.

Additional information

Foreign income tax offset

You are entitled to a foreign income tax offset (FITO) to take into account that you have paid foreign tax. However, it should be noted that:

a)    The Country X tax was paid on the entire amount of the withdrawal including the contributions by you and your employer. However, Australia is only taxing the earnings of the fund. Therefore, the calculation of the FITO will only take into account the Country X tax paid on the portion of the withdrawal that Australia is taxing. That is, the entire amount of Country X tax paid won't be taken into account in the calculation of the FITO.

b)    The FITO is also generally limited to the amount of tax that would be payable in Australia on the portion of the withdrawal that Australia is taxing.

For information on how to calculate the FITO, go to our website and search for QC 67996.

Double tax agreement

The double tax agreement between Australia and Country X is a relevant consideration. However, the tax treatment of the withdrawal by Australia as set out above, is permitted under the agreement.

50% CGT discount not applicable

The 50% discount you referred to in your private ruling application may only apply to amounts that are assessed under the capital gains tax (CGT) provisions. The 50% discount does not apply in this case as your withdrawal is not being assessed under the CGT provisions; rather, it is being assessed under a trust income provision, being section 99B of the ITAA 1936.

Section 102AAM interest

If section 99B of the ITAA 1936 includes a distribution of accumulated income from a non-resident trust 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 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 X is a listed 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 go to https://www.ato.gov.au/Forms/Foreign-income-return-form-guide/, choose 'Chapter 2 Transferor trust and related measures' then choose 'Part 2 Application of section 99B, and the interest charge for beneficiaries of non-resident trust estates'. After you lodge, the ATO will confirm that calculation and the amount payable, if any.