Edited version of private advice

Authorisation Number: 1052226856335

Date of advice: 28 February 2024

Ruling

Subject: Foreign superannuation fund

Question 1

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

Answer

No.

Question 2

Will the provisions of subdivision 305-B of the ITAA 1997 apply to any amounts you receive from the Fund?

Answer

No.

Question 3

Will any amounts you receive from the Fund be assessed under section 99B of ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

You are a citizen of a foreign country (Country A).

You have an Australian permanent residency visa.

You live in Country A.

You and your spouse will move to Australia in the relevant income year.

You and your spouse will become Australian residents for taxation purposes at that point in time.

You have been continuously employed by a private sector company (the Company) in Country A until the relevant income year.

You have remained a resident of Country A for taxation purposes apart from periods of expatriate assignments.

Your employment with the Company will cease in the relevant income year.

You have an unvested pension benefit under the pension scheme (Fund) provided by the Company.

You will receive the total amount as a lump sum if you satisfy the criteria for eligibility under the Fund rules and relevant legislation in Country A.

At the end of your employment in Country A, under the transitional retirement measures:

•                    The Fund will pay you 100% of your vested balance as a lump sum, providing the criteria for retirement has been satisfied.

•                    You will have access to the lump sum based on meeting the transitional criteria and a minimum age as defined in the Fund rules;

•                    In accordance with the Fund's payment rules, upon retirement your acquired reserves are distributed to you. If retirement takes place at or after the normal retirement age, your acquired rights are also paid out.

•                    Transitional measures, in accordance with relevant legislation in Country A, allow early retirement for a contracted employee of the Company under the following criteria:

•                    Leaves employment during the flexible retirement age; and

•                    Is a certain age or older on 31 December 2016; and

•                    Whose age on the date of termination of employment is at least equal to the "early age availability".

At the time you cease employment with the company you will meet the criteria so that both your acquired rights and acquired reserves will be paid to you as a pension lump sum.

The Regulations for the Fund include articles which allow for the benefits to be accessed in the following circumstances:

•                    Upon leaving employment during the flexible retirement age, and

•                    To pledge against an investment loan taken for the purposes of purchasing or renovating income-producing property.

You will receive the total balance of your pension as a lump sum in the income year in which your employment with the Company ceases.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

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

Income Tax Assessment Act 1997 Subdivision 305-B

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

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Meaning of 'foreign superannuation fund'

A 'foreign superannuation fund' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (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 fund's 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'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Subsection 10(1) of the SISA states:

superannuation fund means:

(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 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 Commissioner of Taxation (Cth) (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 judgement 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 accordance with section 62 of the SISA, a regulated superannuation fund must be be 'maintained solely' for the purposes of providing benefits to a member when the events occur:

•                 on or after retirement from gainful employment; or

•                 on attaining a prescribed age; or

•                 on the member's death if the death occurred before the member's retirement or attaining the prescribed age.

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, we consider 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

Because the benefits in the Fund can be withdrawn for purposes other than retirement, the Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes. Specifically:

•                    Funds can be accessed by affiliated employees who leave employment during what is called in the plan, 'flexible retirement age'.

•                    Under this measure, funds are available early from the date of leaving employment.

•                    Australian superannuation legislation does not allow for these types of transitional measures, ie. a 'flexible retirement age'.

•                    The Fund's Regulations allow early access to funds to purchase or renovate a property. This is not allowed under Australian superannuation legislation.

The Fund does not meet the definition of a superannuation fund in subsection 995-1(1) of the ITAA 1997, therefore Subdivision 305-B of the ITAA 1997 will not apply to your pension from the Fund.

Foreign trust income

The Fund does not meet the definition of a foreign superannuation fund, however, amounts received from the Fund are 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 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). Relevantly:

•                 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.

Application to your circumstances

In your case, you will receive a lump sum payment from the Fund which may include amounts that represent the corpus of the trust. The amount that represents corpus includes amounts previously deposited with the Fund.

The amount of the lump sum may include amounts that represent earnings. Earnings of the trust 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, section 99B of the ITAA 1936 applies to you so that:

•                 the proportion of the amounts you have received and that represent amounts previously deposited with the Fund by you and your employer are excluded from your assessable income, and

•                 the proportion of the amounts you have received and that represent earnings (from the date you commenced with the Fund) are included in your assessable income.