Edited version of private advice

Authorisation Number: 1052251875351

Date of advice: 31 May 2024

Ruling

Subject: Assessable income - foreign trust distribution

Question

Is any part of the lump sum payment amount you received from the overseas fund while you were a resident of Australia for tax purposes, assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes. However, this is subject to the exclusions contained in subsection 99B(2) of the ITAA 1936.

This ruling applies for the following period:

For the income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You (X) lived and worked in Country A (X) from 20XX until 20XX and accumulated earnings in your overseas fund's (X) account.

In 20XX, you then moved to Australia and have lived here since then.

You are no longer a permanent resident of Country A and you were required to withdraw the funds from your overseas fund's account by DDMMYYYY.

The balance of AU$X was paid to you on DDMMYYYY to your bank account.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

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

Summary

The overseas fund does not meet the definition of a 'foreign superannuation fund' as per subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The overseas fund is considered to be a foreign trust and is subject to Australian tax under section 99B of the ITAA 1936.

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.

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;

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

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 of the Commonwealth (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 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 following events occur:

(a) on or after retirement from gainful employment; or

(b) attaining a prescribed age; and

(c) on the member's death. (This may require the benefits being passed on to a member's dependants of legal representatives.

Though section 62 of the SISA also allows a superannuation fund to provide benefits for 'ancillary purposes', such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses et cetera.

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 its regulations) 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 the Scott and Mahony cases, 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.

Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund:

(a) can also be used as a savings plan for non-retirement purposes; and/or

(b) contains provisions for pre-retirement withdrawals for general non-retirement purposes such as

housing, education and medical expenses.

It is noted that the overseas fund satisfies some of the requirements of a foreign superannuation fund as it is established and operated outside Australia and the central management and control is outside of Australia. However, the overseas fund is not exclusively a provident, benefit or superannuation fund because it does not provide benefits solely for the specific future purposes of the individual's retirement. Members can withdraw benefits to purchase health cover, housing or for education. In other words, the overseas fund provides for the payment of benefits for reasons other than retirement and is not solely (that is exclusively) for retirement purposes.

Accordingly, this overseas fund does not fall within the definition of a foreign superannuation fund.

Tax consequences of distribution from a foreign trust

The Commissioner considers that this overseas fund is not a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997. The overseas fund is a foreign trust as defined in subsection 481(3) (ITAA 1936) and is therefore a foreign investment fund (FIF).

Repeal of FIF measures

On 14 July 2010, the FIF measures were repealed and do not apply from the 2010-11 income year onwards.

If you have an interest in a FIF, you will be subject to the general tax rules applicable to your circumstances - for example, in your case the general tax rules relating to trust income as per Division 6 of the ITAA 1936 as follows.

Trust income assessable

Section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the ITAA 1936.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, the amount is to be included in the assessable income of the beneficiary.

Exclusions in section 99B of the ITAA 1936

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents either:

•         the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936),

•         amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and

•         amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2) (c) of the ITAA 1936).

Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).

A withdrawal of an amount that represents amounts deposited by you would come within paragraph 99B (2) (a) of the ITAA 1936. Distributions, to the extent that they come within subsection 99B (2) of the ITAA 1936, would be excluded from amounts assessable under subsection 99B (1) of the ITAA 1936.

However, the income accumulated in the fund is normally taxable in Australia and has not been previously subjected to tax in Australia would be assessable to you under subsection 99B(1) of the ITAA 1936.