Edited version of private advice

Authorisation Number: 1052244429714

Date of advice: 23 April 2024

Ruling

Subject: Foreign superannuation fund - assessable income

ISSUE 1

Question 1

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

Answer

Yes.

Question 2

Is any part of the lump sum payment received by you from the Fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

ISSUE 2

Question 1:

Are you entitled to claim a foreign income tax offset for tax paid in Country X in relation to the lump sum payment under subsection 770-10(1) of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were a resident of Country X.

While living in Country X you became a member of the Country X Fund (the Fund).

The benefits of the Fund were not assessable before the specified retirement age with the rules of the Fund stating:

You can choose to take Benefits, in the form of a Pension Commencement Lump Sum and/or income using Income Drawdown, from all or part of Your Pension at any time from the Minimum Pension Age. The Minimum Pension Age is currently age 55.

The Fund also provided death benefits.

You became a resident of Australia for taxation purposes.

You lived in Australia for a significant period prior to you making the choice to receive a lump sum payment (the Payment) from the Fund when you turned 55 years of age.

There were no contributions made into the Fund after you became an Australian resident for taxation purposes.

Upon turning 55 years of age, you made the choice to receive a lump sum payment (the Payment) from the Fund.

On Date 1, the Fund provider sent you a letter in which they advised that an amount had been paid to you which represented an uncrystallised Fund Pension Lump sum payment, with a specified tax amount being deducted from the total Fund value.

You received a lump sum payment (the Payment), paid in Country X currency, with tax being withheld by Country X.

After some months, you received a letter from the Country X Government Authority advising that they had reviewed your tax position and it had been determined that too much tax had been withheld, and you were entitled to a refund of some of the withheld tax, with the total tax payable amount being reduced to the final tax amount, being the Tax Amount.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 section 305-55

Income Tax Assessment Act 1997 subsection 305-55(2)

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Subsection 305-75(2)

Income Tax Assessment Act 1997 Subsection 305-75(3)

Income Tax Assessment Act 1997 Subdivision 770-A

Income Tax Assessment Act 1997 Subsection 770-10(1)

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

Superannuation Industry (Supervision) Act 1993 Section 10

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

Superannuation Industry (Supervision) Act 1993 Paragraph 62(1)(a)

Superannuation Industry (Supervision) Regulations 1994

International Tax Agreements Act 1953

Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, Article 20(3)

Reasons for decision

Issue 1

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

Summary:

The Fund is a foreign superannuation fund as per subsection 995-1(1) of the ITAA 1997.

Detailed reasoning:

Lump sum payments received from certain foreign superannuation funds

Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation lump sum benefits paid from foreign superannuation funds and other foreign schemes for the payment of similar retirement or death benefits, as defined in section 305-55 of the ITAA 1997.

Before determining whether an amount is assessable income under subdivision 305-B of the ITAA 1997, it is necessary to determine whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund (or scheme for the payment of superannuation benefits), Subdivision 305-B of the ITAA 1997 will not apply to the payment.

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:

A superannuation fund is a foreign superannuation fund at a time or for an income year if the fund is not an

Australian superannuation fund at that time or for that 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; 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 active members 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.

The three tests under subsection 295-95(2) of the ITAA 1997 must be satisfied at the same time. If a fund fails to satisfy one of the above tests at a particular time, it is not an Australian fund at that time.

A superannuation fund that is established, managed or controlled outside of Australia or has all of its assets 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.

Section 305-55 of the ITAA 1997 also provides for a lump sum benefit payment (that is not a pension payment) made from a foreign retirement scheme (that provides retirement benefits 'in the nature of superannuation') to receive the same tax treatment as a superannuation lump sum paid from a foreign superannuation fund. However, the conditions in subsection 305-55(2) must be met, including:

a)     the scheme was not established in Australia; and

b)     the scheme is not centrally managed or controlled in Australia.

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 defines a superannuation fund as:

a)     a fund that is:

i) an indefinitely continuing fund; and ii) a provident, benefit, superannuation or retirement fund; or

b)     a public sector superannuation scheme.

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 the case of Baker v FC of T 2015 ATC 10-399; (2015) AATA 469 (Baker), Senior Member O'Loughlin stated that:

...a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund ... Accordingly, for a payment to be a payment from a scheme for the payment of benefits in the nature of superannuation upon retirement the scheme would need to provide for payments that have the essential qualities, character or features of payments of superannuation benefits on retirement. Further, the scheme would need to be such that such payments were more than just possibilities among a range of alternatives such as simple withdrawals available at any time.

In paragraph 62(1)(a) of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member only when one of the following events occurs:

•         on or after retirement from gainful employment

•         attaining a prescribed retirement age

•         the member dies (which may require the benefits to be passed on to the member's dependants or legal representative).

The SISA and the Superannuation Industry (Supervision) Regulations 1994 (SISR) provide guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. This guidance is still relevant to understanding the purpose of foreign superannuation funds, even though the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA) that are established in Australia and operate in Australia.

In view of the legislation and decisions made in the Scott and Baker cases, a fund can only be classified as a superannuation fund if it exclusively provides benefits for the purpose of payment upon the member's retirement, invalidity or death, or as otherwise specified under the SISA and SISR.

A foreign retirement fund is not a superannuation fund for Australian income tax purposes if the fund allows for withdrawals for pre-retirement purposes, such as education, medical expenses or housing costs.

Application to your situation

In this case, the Fund's pension rules provide that the benefits of the fund can only be paid out to fund members or beneficiaries under the following circumstances:

•         The member retires or dies

•         The pension rules state 'You can choose to take Benefits, in the form of a Pension Commencement Lump Sum and/or income using Income Drawdown, from all or part of Your Pension at any time from the Minimum Pension Age. The Minimum Pension Age is currently age 55'.

As the benefits in the Fund are paid only for retirement purposes, the Fund meets the 'sole purpose test' and therefore is a 'superannuation fund' for Australian income tax purposes.

Therefore, a lump sum paid from the Fund is from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Consequently, Subdivision 305-B of the ITAA 1997 does apply to any lump sum payments that you received from the Fund.

Question 2: Is any part of the lump sum payment you received from the Fund assessable as applicable fund earnings under section 305-70 of the ITAA 1997?

Summary:

Part of the lump sum payment received from the Fund is applicable fund earnings under section 305-70 of the ITAA 1997. Therefore, an amount calculated under section 305-70 of the ITAA 1997 should be included in your assessable income in the income year covered by the ruling period.

Detailed reasoning:

When a person receives a lump sum from a foreign superannuation fund more than six 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 section 305-70 of the ITAA 1997.

The applicable fund earnings amount is worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

Subsection 305-75(3) of the ITAA 1997 states, if you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earningsis the amount (not less than zero) worked out as follows:

a)     work out the total of the following amounts:

i.          The amount in the fund that was vested in you just before the day (the start day) you first became an Australian resident during the period;

ii.         the part of the payment that is attributable to contributions to the fund made by or in respect of you during the remainder of the period;

iii.        the part of the payment (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the period;

b)     subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax);

c)     multiply the resulting amount by the proportion of the total days during the period when you were an

Australian resident;

d)     add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

Application to your situation

In this case, you became an Australian resident after you joined the Fund. You were not Australian resident at all times during the period to which the lump sum payment relates. Subsection 305-75(3) of the ITAA 1997 applies when the applicable fund earnings are calculated.

The effect of section 305-75 of the ITAA 1997 is that only the income earned in respect of the foreign superannuation fund since Australian residency, less any contributions made in that period, is assessed. Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the lump sum is paid.

Foreign currency conversion

The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in ATO Interpretative Decision ATO ID 2015/7: Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997. The Commissioner determined that the exchange rate at which it is reasonable to translate amounts into Australian currency for the purposes of section 305-75 of the ITAA 1997, is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. This will be the time when you transfer your benefits from your foreign funds to Australia.

Calculation of your applicable fund earnings

As the you became a member of the UK Fund before becoming a resident of Australia, the growth in the Fund will be worked out in accordance with subsection 305-75(3) of the ITAA 1997.

As discussed above, any amounts in in the foreign currency are translated into Australian dollars using the exchange rate applicable on Date 1.

The applicable Fund earnings in respect to the Payment you received should be calculated under subsection 30570(3) of the ITAA 1997, with the calculated amount being included in your assessable income in the income year covered by the ruling period.

ISSUE 2

Question 1: Can you claim a foreign income tax offset for tax paid in Country X in relation to the lump sum payment under subsection 770-10(1) of the ITAA 1997?

Summary:

You are entitled to claim a foreign income tax offset for the tax paid in Country X in relation to the lump sum payment received from the Fund.

Detailed reasoning:

Assessable income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

In determining liability to Australian tax on foreign sourced income received by a resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable Double Tax Agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law.

The double taxation agreement between Australia and Country X (the DTA) includes the following in relation to ordinary income at Article 20:

1.             Items of income beneficially owned by a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

2.             The provisions of paragraph 1 of this Article shall not apply to income, other than income from real property as defined in paragraph 2 of Article 6 of this Convention, derived by a resident of a Contracting State who carries on business in the other Contracting State through a permanent establishment situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment. In that case the provisions of Article 7 of this Convention shall apply.

3.             Notwithstanding the provisions of paragraphs 1 and 2 of this Article, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention from sources in the other Contracting State may also be taxed in the other Contracting State.

Foreign income tax Offset

Subdivision 770-A of the ITAA 1997 sets out the rules for claiming a foreign income tax offset (FITO).

To be entitled to FITO under subsection 770-10(1) of the ITAA 1997, the following requirements must be met:

•         The tax offset must be for an amount of a foreign income tax

•         The taxpayer must have 'paid' an amount of foreign income tax; and

•         The income or gain on which the taxpayer paid foreign income tax must be paid in respect of an amount included in the taxpayer's assessable income for the income year.

To count towards a tax offset, the foreign income tax must have been paid on income, profits or gains that are included in your income for Australian income tax purposes. There must be a nexus between the payment of the foreign income tax and the tax liability of the taxpayer.

The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset.

Application to your situation

In your case you are a resident of Australia for taxation purposes and were taxed in relation to the lump sum payment received from the Fund in Country X.

The DTA does not have an Article that specifically deals with lump sum payments from superannuation funds. Therefore, Article 20 of the DTA dealing with 'Other Income' will apply.

In accordance with Article 20(3) of the DTA, the lump sum payment is taxable in both Australia and Country X.

You were originally taxed a specified amount, which was later reduced to the Taxed Amount, with an amount of the original tax amount being refunded to you.

As you meet the relevant conditions, you can claim a FITO for the Tax Amount you paid in Country X in relation to the lump sum payment received from the Fund under subsection 770-10(1) of the ITAA 1997.