Edited version of private advice

Authorisation Number: 1052150413699

Date of advice: 9 January 2024

Ruling

Subject: Taxation of a foreign lump sum

Question 1

Is the overseas Benefit Scheme 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Will any part of the payment withdrawn from the overseas Benefit Scheme be included in the assessable income of the Taxpayer under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commences on

1 July 2021

Relevant facts and circumstances

The Taxpayer left Australia and worked overseas in Country A.

The Taxpayer was employed by overseas employer (the Employer) from XX/XX/2018 until XX/XX/2022.

The Taxpayer returned permanently to Australia. They utilised their annual leave and officially ceased employment.

While living overseas and working for the Employer, the Taxpayer became a member of the Benefit Scheme.

The Taxpayer provided extracts of the 'Member Booklet' and Benefit Scheme policy.

The Member Booklet states under 'Benefits' that:

Upon cessation of employment due to resignation, retirement, termination (excluding dismissal for cause) or death, you or your beneficiaries will receive 100% of the account balance due to you, subject to the Minimum MPF Benefit preservation rules.

Relevantly, the Benefit Scheme's policy provides the following:

What benefit will I receive if I leave service before retirement

.....

The 'minimum MPF benefits' (MMB) must be transferred to an MPF scheme chosen by the employee and preserved according to the MPF legislation until any of the following circumstances occurs. For details, please refer to the MPF legislation.

•         reaching the age of 65,

•         early retirement at age 60 or above,

•         permanent departure from overseas,

•         death,

•         total incapacity,

•         small balance account withdrawal,

•         terminal illness.

.....

You will receive the amount of benefit from the Scheme (including the amount derived from the Company's and your contributions) exceeding the MMB upon termination of employment.

The Taxpayer's total accrued benefit accumulated during employment with the Employer was XXX,XXX.XX.

The preserved benefit held under the minimum prescribed benefit rules is XXX,XXX. This amount was retained and transferred to a different overseas account.

The remaining XXX,XXX.XX was paid out to the Taxpayer on XX/XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99B

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

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

Superannuation Industry (Supervision) Act 1993 subsection 10(1)

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Summary

The Benefit Scheme does not satisfy the meaning of 'superannuation fund' under subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SISA). Accordingly, the Scheme is not a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income is not to include any amount that represents the corpus of the trust - but an amount that is attributable to income of the trust which would have been included in the assessable income of a resident taxpayer if it had been derived by that taxpayer.

Consequently, the assessable amount under section 99B of the ITAA 1936 is the total amount received less any amounts contributed to the fund (the corpus) by the taxpayer, or on their behalf.

Detailed reasoning

Foreign superannuation fund

Section 305-70 of the ITAA 1997 provides that where the Taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, they include the 'applicable fund earnings' of the lump sum (if any) in their 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'.

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 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 Benefit Scheme allows an existing member, subject to the Minimum MPF Benefit preservation rules, to withdraw 100% of their existing account balance upon the termination of their employment. The retained Minimum MPF Benefit is then transferred to a different Benefit Scheme in Country A. The termination of employment may occur prior to a member attaining early retirement age of 60 or reaching age of 65. In this case, the Taxpayer was under retirement age at the time of their termination and the subsequent withdrawal of their benefit.

The Minimum MPF Benefit may also be withdrawn on permanent departure from Country A.

Based on the provided information, the Benefit Scheme satisfies some of the requirements of a foreign superannuation fund. However, the Benefit Scheme is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purpose of the individual's retirement. Members can withdraw benefits on their termination, prior reaching their early retirement age of 60 or reaching age of 65, and also on the permanent departure from Country A. In other words, the Benefit Scheme provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

Accordingly, any payment from the Benefit Scheme 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. The payment will instead be assessable to the Taxpayer under section 99B of the ITAA 1936.

Assessable income from a payment by a foreign entity that is not a superannuation fund

Foreign trust income

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.

Section 99B of the ITAA 1936 deals with the receipt of trust income 'not previously subject to tax' in Australia and applies where an Australian resident taxpayer receives a lump sum payment from a foreign retirement or investment fund. Section 99B takes precedence over section 97 of the ITAA 1936 in assessing these types of payments.

Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust who was a resident at any time during the year of income, the amount is to be included in the assessable income of the beneficiary. This amount will be deemed income at the time of the withdrawal.

However, subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income is not to include any amount that represents the corpus of the trust - but an amount that is attributable to income of the trust which would have been included in the assessable income of a resident taxpayer if it had been derived by that taxpayer.

Consequently, the assessable amount is the total amount received less any amounts contributed to the fund (the corpus) by the taxpayer, or on their behalf. The rule is that the taxpayer is taxed only on the earnings of the investment on withdrawal, not on the corpus returned to them. Any earnings in the fund are only assessable in Australia on withdrawal from the fund.