Edited version of private advice

Authorisation Number: 1052257842636

Date of advice: 31 May 2024

Ruling

Subject: Inherited foreign retirement fund

Question 1

Are your two inherited Accounts treated as foreign superannuation funds as defined in section 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is any part of the distribution to you from the Accounts from a scheme for the payment of a benefit in the nature of superannuation upon retirement or death that satisfies the conditions set out in subsection 305-55 of the ITAA 1997?

Answer

No.

Question 3

Is any part of the distributions received from the Accounts applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

No.

Question 4

Will any part of the distributions from the Accounts be assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 5

Will you be entitled to a foreign income tax offset for foreign tax paid in relation to the distribution from your accounts to the extent the amount is included in your assessable income?

Answer

Yes.

This ruling applies for the following period:

xx/xx/20xx

The scheme commenced on:

xx/xx/20xx

Relevant facts and circumstances

You are a Country A and Australian permanent resident living and working in Australia.

You are an Australian resident for tax purposes.

Your parent, a Country A resident, passed away on xx/xx/20xx.

On xx/xx/20xx, you were notified via letter that you were the beneficiary of your parent's retirement accounts held by Company X in an individual retirement account and a traditional account.

On xx/xx/20xx, you signed the beneficiary settlement form from Company X creating your own Company X membership account. The effect of this was to transfer your parent's traditional and Account funds from their Company X membership account to your own Company X membership account.

On xx/xx/20xx, the Account was rolled over into your membership account with Company Y.

On xx/xx/20xx, the traditional Account was transferred into your Company Y membership account.

As you are not the original owner of the Accounts, you are required to take out a minimum distribution from each account every year.

In xx/20xx you were distributed XX from the traditional Account.

Of this distribution YY was withheld for Country A tax.

The ZZ you received has remained in your Country A bank account without earning interest.

The Company Y acts as the custodian for your inherited Accounts. Under the custodial agreement with Company Y, Company Y is responsible for holding and managing your funds however, you, the depositor, remain liable for any relevant Country A taxes.

According to Country A rules, distributions can be made from the Accounts before reaching retirement age. These distributions, however, incur an additional 10% tax to the part of the distribution to be included in individual's gross income.

There are also a number of qualified exceptions that are not subject to this 10% additional tax. These include:

•         First-time home purchase;

•         Qualified education expenses: such as, tuition, fees, books, supplies, required equipment, and room and board;

•         Unreimbursed medical bills;

•         Health insurance premiums while unemployed;

•         Due to a disability;

•         Childbirth or adoption expenses.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 305-55

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

Income Tax Assessment Act 1997 subsection 305-55(3)

Income Tax Assessment Act 1997 section 305-75

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

Income Tax Assessment Act 1997 section 770-190

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

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

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

Superannuation Industry (Supervision) Act 1993)section 10

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

Reasons for decision

Issue 1 Status of foreign retirement fund

Question 1

Are your two inherited the Accounts treated as foreign superannuation funds as defined in section 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

No. Your two inherited Accounts will not be treated as foreign superannuation funds.

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;

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 does 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'

Whether either of the funds are a foreign superannuation fund requires consideration of the meaning of the term 'provident, benefit, superannuation or retirement fund' in subsection 10(1) of the SISA. Each of these terms are not defined in the ITAA 1936, ITAA 1997, the SISA or elsewhere in the tax acts. Accordingly, those terms will derive their meaning from their ordinary meaning and the relevant case law.

In the context of considering the term 'provident, benefit or superannuation fund established for the benefit of employees', in former subparagraph 23(j)(i) of the ITAA 1936, the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232 (Mahony) considered that this phrase denoted 'a purpose narrower than the conferral of benefits in a completely general sense' and had to be characterised by 'some specific future purpose'. In the case of a provident fund, against 'contemplated contingencies; in the case of a superannuation fund 'on retirement, death or cessation of employment'; and, in the case of a benefit fund 'a benefit characterised by some specific future purpose' (e.g., a funeral fund).

Furthermore, Justice Kitto's judgement in Mahony indicated that a fund does not satisfy any of the three provisions, that is, either a 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'.

A similar approach was also adopted by Taylor J and Windeyer JJ:

...In other words, if they could, keeping within the terms of the trust, apply the fund or any portion thereof to purposes foreign to the true purposes of such a fund, then it would not be such a fund.

Accordingly, the purpose of the fund must be solely consistent with it being a 'provident, benefit or superannuation fund'.[1] Similar observations have been made in a number of other authorities.[2]

In the context of what constitutes a 'superannuation fund' and a 'fund', Justice Windeyer in Scott v. Federal Commissioner of Taxation (No. 2) (1966) 40 ALJR 265 emphasised the 'sole purpose' requirement, stating:

...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.

More recently, in considering the term 'provident, benefit, superannuation or retirement fund' as it now appears in the definition of 'superannuation fund' in subsection 10(1) of the SISA, Senior Member FD O'Loughlin in Baker v. FC of T [2015] AATA 469 (Baker) stated at [16]:

Accordingly, 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.

While the Senior Member in Baker made reference to 'benefits not permitted by the Supervision Act' in the context of considering whether a particular fund which was not a 'provident, benefit or retirement fund' was a 'superannuation fund', it is noted that section 62 of the SISA largely replicates the relevant case law and requires the fund be 'maintained solely' for one or more of the 'core purposes' of providing benefits to a member when the events occur:

         on or after retirement from gainful employment;

         attaining a prescribed age; or

         on the member's death (this may require the benefits being passed on to a member's dependants or legal representative).

Whether a fund has been established for the requisite purpose required, is determined by considering the terms of the trust deed. This is an objective determination, and it is not determined by the subjective intentions of the parties. Whether a particular arrangement constitutes a superannuation fund is dependent upon the facts and circumstances of the case. Regard is had to the terms of the constituent arrangements and what the relevant trustee can and cannot do, and is and is not obliged to do, with the trust assets and property.

Application to your circumstances

In the present case, the funds comprise of retirement accounts that allow early withdrawals for first-time home purchase, qualified education expenses, unreimbursed medical bills, health insurance premiums while unemployed, due to a disability, and childbirth or adoption expenses. In addition, personal contributions can be withdrawn at any time regardless of the member's age.

While the funds provide their members with some benefits which are consistent with it being a superannuation fund for the purposes of the definition in subsection 10(1) of the SISA, that is not the funds' sole purpose. The funds also provide benefits that are inconsistent with it being a 'provident, benefit, superannuation or retirement fund'.

Accordingly, as the funds permit the withdrawal of benefits for purposes not solely consistent with the fund being a 'superannuation fund', neither of the funds can be a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Question 2

Is any part of the distribution to you from the Accounts from a scheme for the payment of a benefit in the nature of superannuation upon retirement or death that satisfies the conditions set out in subsection 305-55 of the ITAA 1997?

Summary

No part of the distribution to you from the Accounts is from a scheme that satisfies the conditions in subsection 305-55 of the ITAA 1997.

Detailed reasoning

Payment 'in the nature of superannuation upon retirement or death'

Where a fund is not a superannuation fund, consideration must be given as to whether the payment is made from a scheme for the payment of benefits 'in the nature of superannuation upon retirement or death' as contemplated by subsection 305-55(2) of the ITAA 1997.

Subsection 305-55(3) of the ITAA 1997 ensures that payments from foreign superannuation schemes under subsection 305-55(2) are taxed in the same way as if they were paid from a 'foreign superannuation fund'. It is intended to apply to payments that, though not from a superannuation fund, are nevertheless payments made from a scheme that has the same characteristics as superannuation.

Subsection 305-55(2) of the ITAA 1997 does not define the concept of payment of benefits 'in the nature of superannuation'.

The ordinary meaning of 'in the nature of' is something similar to, typical of, or in the manner of' superannuation. Therefore, payments which closely align with the purpose of superannuation will amount to payments in the 'nature of superannuation'.

In Baker, Senior Member FD O'Loughlin stated at [19]:

... 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.

Baker was decided on the basis money could be withdrawn from an Individual Retirement Account (IRA) at any time prior to any retirement event at the complete discretion of the IRA holder. Due to the flexibility of monetary withdrawals, 'in the nature of superannuation' payments from the IRA were but one of a number of possibilities. Accordingly, this meant that the scheme was not one for the payment of benefits 'in the nature of superannuation upon retirement or death' within the meaning of section 305-55(2) of the ITAA 1997.

Application to your circumstances

Similarly, in the present case, whilst moneys could be withdrawn from the funds for purposes that do come within 'the nature of superannuation upon retirement or death', this was only one of a range of reasons for which benefits could be eventually withdrawn. Those other reasons have no direct connection with a benefit provided 'in the nature of superannuation upon retirement or death'.

Therefore, it cannot be considered that moneys paid from the funds are paid from a scheme this is solely for the payment of benefits 'in the nature of superannuation upon retirement or death' as contemplated by subsection 305-55(2) of the ITAA 1997.

Question 3

Is any part of the distributions received from the Accounts applicable fund earnings under section 305-75 of the ITAA 1997?

Summary

No part of the distributions are applicable fund earnings under section 305-75 of the ITAA 1997.

Detailed reasoning

Taxation of funds as applicable fund earnings

As neither of the funds are a 'foreign superannuation fund' and nor is the payment paid from a scheme for the payment of benefits 'in the nature of superannuation upon retirement or death', section 305-70 of the ITAA 1997 does not apply to any lump sum received by you from the funds. Accordingly, no part of any such lump sum is applicable fund earnings for the purposes of section 305-75 of the ITAA 1997.

Issue 2 Taxation of foreign trust distributions

Question 4

Will any part of the distributions from the Accounts be assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

The proportion of any withdrawal that represents the earnings of your Company Y account are included in your assessable income under section 99B of the ITAA 1936.

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.

However, subsection 99B(2) of the ITAA 1936 reduces the amount to be included in assessable income under subsection 99B(1) by so much of that amount, relevantly for present purposes, as represents the 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.

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

Despite the arrangement being referred to as a custodian arrangement, the practical operation of the arrangement means it will be considered a trust arrangement and any distributions from the relevant accounts subject to section 99B.

Generally, the full amount received is assessable under subsection 99B(1) subject to the reductions in subsection 99B(2), with the most relevant being amounts that represent corpus. In your case, the amounts that were transferred to your Company Y accounts are considered corpus. Withdrawals you make from Company Y may also include amounts that represent earnings of the funds that were in the accounts. Earnings are not taken to represent corpus, as the earnings are attributable to income derived by the funds which would have been subject to tax had they been derived by a resident taxpayer.

Therefore, paragraph 99B(2)(a) applies to you so that:

a)            the proportion of any withdrawal that represents the amounts that were transferred to your Company Y account are corpus and not assessable under section 99B, and

b)            the proportion of any withdrawal that represents the earnings of your Company Y account are included in your assessable income under section 99B.

Question 5

Will you be entitled to a foreign income tax offset for tax paid in the Country A in relation to the distribution from your Company Y accounts to the extent the amount is included in your assessable income?

Summary

You will be entitled to claim a foreign income tax offset that corresponds to the Country A tax paid on the proportion of the withdrawals from the Accounts that is included in your assessable income under section 99B of the ITAA 1936 in the relevant income year.

Detailed reasoning

Subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a taxpayer is entitled to a foreign income tax offset (FITO) for foreign income tax paid in respect of an amount that is included in their assessable income. This offset is for the income year in which an amount in respect of which the taxpayer paid foreign income tax is included in their assessable income-even if the taxpayer paid the foreign income tax in another income year.

Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains. The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset.

Article 22 paragraph 2 of the Convention between the Government of Australia and the Government of the Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (Country A -Australia DTA) provides that Australia will allow a credit for Country A (other than Country A tax imposed solely by reason of citizenship or by an election by an individual under Country A domestic law to be taxed as a resident of the Country A) on income derived by a resident of Australia from sources in the Country A.

Section 770-190 allows taxpayers to amend an assessment within 4 years of paying an amount of foreign income tax in order to claim a foreign income tax credit.

Application to your circumstances

The Country A will impose income tax on withdrawals you make from your inherited traditional Account. Company Y manages this by withholding the relevant tax amount upon you making a withdrawal.

Your inherited traditional Account is considered a flow through entity for Australian tax purposes and is not taxed in its own right in the Country A. In addition, you are solely liable for any tax associated with your inherited traditional Account.

In your case, you will be entitled to claim a foreign income tax offset that corresponds to the foreign tax paid on the proportion of the withdrawals from the Account that is included in your assessable income under section 99B of the ITAA 1936 in the relevant income year. You will not be able to claim an offset for the proportion of the withdrawals that represent the corpus of the funds as those amounts are not assessable in Australia.

For more information on FITO, please refer to the page Claiming a foreign income tax offset or search for 'QC 72205' on ato.gov.au.

[1] See further the discussion of Member McCaffrey in Case R49 16 TBRD 219 at 221-222 as to whether an employee benefit fund was a 'provident, benefit or superannuation fund'.

[2] Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468; Compton v Federal Commissioner of Taxation (1966) 116 CLR 233; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1.