Edited version of private advice

Authorisation Number: 1052246383700

Date of advice: 2 May 2024

Ruling

Subject: Foreign retirement fund

Question 1

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

Answer

No. Your retirement fund is not a foreign superannuation fund as per subsection 995-1(1) of the Income Tax Assessment Act 1997.

Question 2

Will you be assessed on withdrawals from your retirement fund?

Answer

Yes. Section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) will tax you on amounts that represent earnings in your retirement fund.

This ruling applies for the following period:

6 December 2023 - 30 June 2025

The scheme commenced on:

6 December 2023

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You moved to Australia from Country A in 20XX.

While living in Country A you became a member of the Country A retirement fund.

Since opening the account, contributions to your retirement fund were made by yourself and your employer.

The retirement fund is designed to safeguard its members savings for retirement.

Members' savings are divided between two accounts: Account 1 and Account 2.

Withdrawals from Account 1 are limited to retirement purposes.

Withdrawals from Account 2 can be made to pay for housing, education and related travel expenses, health insurance and funding Hajj (the Islamic pilgrimage to Mecca, Saudi Arabia).

The retirement age in Country A is 55.

Between the ages of 55 and 59, you are able to withdraw all your funds from your retirement fund.

Upon turning 55 in May this year, you intend to withdraw your funds and deposit them into your Australian bank account.

You have not decided whether to put the funds into your superannuation account or whether to pay off your housing loan first.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 paragraph 99B(2)(a)

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 subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 section 10

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

Reasons for decision

Question 1

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

Answer

No. Your retirement fund is not a foreign superannuation fund as per subsection 995-1(1) of the Income Tax Assessment Act 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 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;

iii)   is attributable to superannuation interests held by active members who are Australian residents.

The three tests under subsection 295-95(2) 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:

a.    on or after retirement from gainful employment

b.    attaining a prescribed retirement age

c.     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 circumstances

In this case, the governing legislation of your retirement fundstates that 'The Board may authorize an application of a member of the Fund to withdraw part of the amount standing to his credit upon any terms and conditions as may be prescribed by the Board if the Board is satisfied' and provides that partial benefits of the fund can be paid out to fund members under the following circumstances:

a.    the member of the Fund has attained the age of fifty years;

b.    the member of the Fund has purchased or built a house;

c.     the member of the Fund or any other person approved by the Board requires medical financing;

d.    the member of the Fund requires financing for higher learning for himself, his child, spouse or parent;

e.    the Muslim member of the Fund has received the letter of offer from Lembaga Tabung Haji to perform haj and requires financing for the cost of performing the haj;

f.      the member of the Fund has a credit which exceeds one million ringgit in his account;

g.    the member of the Fund takes an insurance policy or a takaful certificate, as may be determined by the Board from an insurance or takaful company approved by the Minister subject to any terms and conditions as he thinks appropriate, for himself, or himself and any other person approved by the Board.

As the benefits in the fund are not only for retirement purposes, the fund does not meets the 'sole purpose test' and therefore is not a 'superannuation fund' for Australian income tax purposes.

Therefore, a lump sum paid from this fund is not 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 not apply to any lump sum payments that you will receive from your retirement fund.

Question 2

Will you be assessed on withdrawals from your retirement fund?

Answer

Yes. Section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) will tax you on amounts that represent earnings in your retirement fund.

Detailed reasoning

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 a lump sum payment 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.

Paragraph 99B(2)(a) states that an amount will not be included in a beneficiary's assessable income to the extent that it represents corpus of the trust estate (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).

The term 'corpus' is not defined in the legislation; therefore, it takes the ordinary meaning of the term. The Macquarie Dictionary (Online edition 2019) defines 'corpus' to mean a 'principal or capital sum, as opposed to interest or income'.

Application to your circumstances

In this case, you intend to withdraw the entirety of the funds in your retirement fund. The amount that represents the corpus of your retirement fund includes any amounts previously deposited into the fund by you and your employers. The amount you withdraw from your retirement fund may also include amounts that represent earnings of the fund.

Subsection 99B(1) will operate to include the entire amount in your assessable income.

Paragraph 99B(2)(a) will apply to you so that:

a)    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

b)    the proportion of the amounts you have received and that represent earnings (from the commencement date of the fund) are included in your assessable income, 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.