Edited version of private advice

Authorisation Number: 1052215336339

Date of advice: 25 January 2024

Ruling

Subject: Foreign trust distributions

Question 1

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

Answer

No, Fund A is not a foreign superannuation fund.

Question 2

Is Fund B, a foreign superannuation fund as defined in section 995-1 of ITAA 1997?

Answer

No, Fund B is not a foreign superannuation fund.

Question 3

Will any part of the amount withdrawn from Fund A or B, be assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes, the fund is considered a foreign trust and a portion of the amount paid to you will be subject to tax.

Question 4

Will you be liable for additional tax under section 102AAM of ITA 1936?

Answer

Yes, there is no discretion for the Commissioner in applying section 102AAM.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You have been an Australian resident for tax purposes since XX 20XX.

You were a resident of X from 20XX, until you became an Australian resident.

Prior to becoming an Australian resident, you worked in X and X, and made contributions to Fund A and Fund B.

Both funds were established outside of Australia and have their central management and control outside of Australia. All contributions made to the plans were made while you were a non-resident of Australia.

You intend to withdraw your balances from Fund A and Fund B in the form of lump sum withdrawals and repatriate the funds to Australia to be used for personal expenses.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 295-95(2)

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

Superannuation Industry (Supervision) Regulations 1994

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 section 102AAM

Reasons for decision

Issue 1

Foreign superannuation fund

Question 1

Is Fund A a foreign superannuation fund as defined in section 995-1 of ITAA 1997?

Summary

No, the fund is not a foreign superannuation fund.

Question 2

Is Fund B a foreign superannuation fund as defined in section 995-1 of ITAA 1997?

Summary

No, the fund is not a foreign superannuation fund.

Detailed reasoning

Meaning of 'foreign superannuation fund'

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.

Relevantly, 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.

Meaning of 'superannuation fund'

Subsection 995-1(1) of 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.

Meaning of 'provident, benefit, 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 held 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' such as the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kitto's judgment indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the 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/p>

passed on to a member's dependants or legal representative).

Notwithstanding the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and the Superannuation Industry (Supervision) Regulations 1994 (SISR)) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

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 and the SISR.

Application to your circumstances

In this case, Fund A and Fund B satisfy some of the requirements of a foreign superannuation fund as they are established outside of Australia and the central management and control is outside of Australia. However, the funds are not exclusively a provident, benefit or superannuation fund because they do not provide benefits only for the specific future purposes of the individual's retirement.

Specifically, in the Trust Deed for both funds, Rule X of 'The Schedule' states:

"If a Participant retires from Service with the consent of his Employer and he is within 10 years of his Normal Retirement Age he shall be entitled to an immediate pension..."

Because benefits can be withdrawn before retirement age, Fund A and Fund B do not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes. Accordingly, the Fund A and Fund B do not fall within the definition of a 'foreign superannuation fund'.

Issue 2

Taxation of foreign trust income

Question 3

Will any part of the amount withdrawn from Fund A or B be assessable income under section 99B of ITA 1936?

Summary

Yes, the fund is considered a foreign trust and a portion of the amount paid to you will be subject to tax.

Question 4

Will you be liable for additional tax under section 102AAM of ITA 1936?

Summary

Yes, there is no discretion for the Commissioner in applying section 102AAM.

Detailed reasoning

Trust income not previously subject to tax in Australia

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 ITAA 1936. Broadly, section 99B of 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 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 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 ITAA 1936 or that are or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of ITAA 1936; or

(d)  amounts included in assessable income under section 102AAZD of ITAA 1936 (that is, amounts included under the transferor trust measures for a taxpayer having transferred property or services).

Interest charge on distributions of trust income

Section 102AAM of ITAA 1936 operates so that where your assessable income includes an amount specified in section 99B, you may be liable to pay additional tax in the form of an interest charge on the distribution.

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.

For further information see the 'Foreign income tax return form guide' available at ato.gov.au by searching for QC 66597. Refer to Chapter 2 "Transferor trust and related measures", Part 2, Section 2.

Application to your circumstances

When withdrawing your balances from Fund A and Fund B, you will receive 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, 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. Therefore, paragraph 99B(2)(a) of 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.

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.

You also need to complete the section 102AAM calculation and include the amount on an additional information schedule when lodging the relevant income tax return. Both X and X are listed countries. After you lodge, the ATO will confirm your calculation and the amount payable.