Edited version of private advice

Authorisation Number: 1052198695406

Date of advice: 30 November 2023

Ruling

Subject: Taxation of a foreign lump sum

Questions:

1.    Is the Country X Fund a 'foreign superannuation fund' as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2.    Will any part of the payment withdrawn from the Country X Fund be included in the assessable income of the Taxpayer under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

3.    Can a tax credit be claimed for foreign tax paid in the Country X under subsection 770-10(1) of the ITAA 1997 on the withdrawal?

4.    If the corpus of the foreign fund is found not to be included as the Taxpayer's taxable income under subsection 99B(2) of the ITAA 1936, do all employer contributions make up the corpus that is not to be included?

Answers:

1.    No.

2.    Yes.

3.    Yes.

4.    Yes.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commences on

3 March 2022

Relevant facts and circumstances

The Taxpayer held an interest in the Country X Fund.

The Country X Fund is a retirement fund established and managed outside Australia.

The following statements were provided as part of the Taxpayer's application:

•         The Taxpayer joined the Country X Fund on XX/XX/XXXX while working as a resident in the Country X

•         At that time, the Taxpayer was not an Australian resident for tax purposes.

•         The Taxpayer's Country X employer made pre-tax employer contributions to the Country X Fund during his employment while residing in the Country X.

•         The Taxpayer moved to Australia on XX/XX/XXXX, at which point he became an Australian resident for tax purposes.

•         The Taxpayer continued to work remotely for the Country X employer, which continued to contribute to the Country X Fund.

•         The Taxpayer resigned with the Country X employer around XX/XX/XXXX.

•         On XX/XX/XXXX the Taxpayer withdrew the total balance from his Country X Fund. The amount totalled $XX,XXX.XX USD.

•         The Country X Fund withheld $XX,XXX.XX USD (30%) in Federal Withholding tax.

•         The Taxpayer lodged a CountryX Tax return for the 2022 calendar year.

•         The total of $XX,XXX.XX USD was deemed taxable in the Country X.

•         $XX,XXX.XX USD was payable on the $XX,XXX.XX USD and $XX,XXX.XX USD was refunded back to the Taxpayer on the original $XX,XXX.XX USD that was withheld.

1.      The provided Country X Fund's 'Summary Plan Description' as of XX/XX/XXXX states that benefits may be paid in the event of employment being terminated. Further, after-tax contributions can be withdrawn from the US Fund at any time regardless of the member's age.

2.      The Taxpayer's date of birth is XX/XX/XXXX.

3.      The Taxpayer was XX years of age at the time of the withdrawal.

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 section 770-10

Income Tax Assessment Act 1997 section 960-50

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

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

Case Law

Scott v Federal Commissioner of Taxation (No.2) (1966) 10 AITR 290; (1966) ALJR 265; (1966) 14 ATD 333

Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519

Reasons for decision

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 Scottand 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 US Fund is a provident fund that allows an existing member to withdraw up to 100% of their benefits on the resignation/termination of employment. The resignation/termination of employment may occur prior to a member attaining the retirement age of 65. The Taxpayer was XX years of age at the time of the withdrawal.

Based on the provided information, the Country X Fund satisfies some of the requirements of a foreign superannuation fund. However, the Country X Fund 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 resignation/termination, prior to retirement age. Further, after-tax contributions can be withdrawn at any time and at any age. In other words, the Country X Fund 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 Country X Fund 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

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 payments 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 excludes certain amounts from being in assessable income under subsection 99B(1). Most relevant to the Taxpayer are:

•         paragraph 99B(2)(a) excludes 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

•         paragraph 99B(2)(b) excludes amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer.

In this case, the Taxpayer withdrew the entire balance from their Country X Fund following the Taxpayer's resignation from the Country X employer. This included amounts that represented the corpus of the trust. The amount that represented corpus includes amounts previously deposited with the Country X Fund.

Therefore, paragraph 99B(2)(a) of the ITAA 1936 applies to the Taxpayer so that:

•         the proportion of the amount the Taxpayer received that represents amounts previously deposited in their Country X Fund by the Taxpayer and their employer are excluded from the Taxpayer's assessable income, and

•         the proportion of the amount the Taxpayer received that represents earnings and capital gains (from the date the Taxpayer commenced employment with the Country X employer) are included in the Taxpayer's assessable income, as earnings and capital gains are attributable to income derived by the trust which would have been subject to tax had they been derived by a resident taxpayer.

Foreign income tax offset

The foreign income tax offset (FITO) provisions are contained in Division 770 of the ITAA 1997. The Taxpayer may get a non-refundable tax offset for foreign income tax paid on your assessable income. There is a limit on the amount of the tax offset. A resident of a foreign country does not get the offset for some foreign income taxes.

The offset is for the income year in which the Taxpayer's assessable income included an amount in respect of which the Taxpayer paid foreign income tax - even if the Taxpayer paid the foreign income tax in another income year.

If the foreign income tax has been paid on an amount that is only part assessable income, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset.

The Taxpayer paid income tax in the Country X in relation to the lump sum they received. A portion of the lump sum will be included in the Taxpayer's Australian income tax return. The Taxpayer is entitled to claim FITO for the income tax paid in the Country X to the extent that it relates to the proportion being included in their assessable income. The offset is claimed in the same year that the income is included in the Taxpayer's return.

There is a limit on the amount of the tax offset for a year (section 770-75 of the ITAA 1997). If the Taxpayer claims an offset of $1,000 or less, the Taxpayer only needs to record the actual amount of foreign income tax paid that counts towards the offset. If the Taxpayer claims more than $1,000, they will have to work out their foreign income tax offset limit. The Taxpayer can find more information about how to do this on our website, searching for a Quick Code QC 72280.