Edited version of private advice

Authorisation Number: 1052332989530

Date of advice: 2 December 2024

Ruling

Subject: Foreign superannuation fund

Question 1

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

Answer

No.

Question 2

Is any part of the lump sum payment to you from XXXX applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

No.

Question 3

Is any part of the lump sum payment to you from XXXX assessable income under 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 4

Are the annuity payments made to you from XXXX assessable income under 99B of the ITAA 1936?

Answer

No, the annuity payments are assessable income under section 27H of the ITAA 1936.

This ruling applies for the following period:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XXXX is a foreign country's retirement savings plan (the Foreign Fund), where a member can make contributions up until the age of X.

The Taxpayer is a member of the Foreign Fund.

The Taxpayer became a resident of Australia for taxation purposes on XX March 20XX.

The Taxpayer took a portion of their benefits in the Foreign Fund as a lump sum payment, and the balance of the benefits will be taken as annuity. The lump sum payment was made on XX April 20XX.

The Taxpayer has not made any contributions to the Foreign Fund since becoming a resident of Australia.

The conditions of the Foreign Fund provides, before retirement a member can:

•         make one partial or full withdrawal in respect of each contribution transferred to the fund, subject to the requirements of the transferring fund and/or legislation and/or regulatory authorities.

•         If a member makes a part withdrawal, the member will not be allowed to make another withdrawal in respect of that contribution and the remaining amount will have to remain invested until the member's retirement or death.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99B

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

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

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

Summary

XXXX is not a foreign superannuation fund as defined in section 995-1(1) of the ITAA 1997.

No part of the lump sum payment to the Taxpayer from XXX will be applicable fund earnings under section 305-75 of the ITAA 1997.

A part of the lump sum payment to the Taxpayer from XXXX may be assessable income under 99B of the ITAA 1936.

The annuity payments made to the Taxpayer will not be assessed under section 99B of the ITAA 1936 but will be assessed under section 27H of the ITAA 1936.

Reasons for decision

Question 1

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

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 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 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'

Whether the Foreign Fund is 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; (1967) 14 ATD 519 (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 Mahony who said:

...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) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 emphasised the 'sole purpose' requirement, state:

...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

Whilst 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 dependant 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.3 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.4 As Taylor and Windeyer JJ observed in Mahony:

It thus becomes necessary to look carefully and critically at the terms of the trust deed, at what is required and what is permitted - that is to say in what ways the trustees might, without any breach of the trusts it imposes, apply the trust property.

The Foreign Fund

Some X country funds only allow a member to access their benefits at retirement, death or incapacity, subsequently they would meet the definition of foreign superannuation fund.

Where a X country fund allows an existing member to withdraw up to 100% of their benefits on the transfer of benefits to retirement, termination of employment or on emigration to another country, then it would not meet the definition of a foreign superannuation fund. Some of these funds may also allow member's access to a housing loan.

In this case, the Foreign Fund satisfies some of the requirements of a foreign superannuation fund, however the fund is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purposes of the individual's retirement. Members can make one full or partial withdrawal for each contribution transferred to the fund prior to retirement age. In other words, the fund provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

Accordingly, the Foreign Fund is not considered a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Question 2

Is any part of the lump sum payment to you from XXXX applicable fund earnings under section 305-75 of the ITAA 1997?

Detailed reasoning

Taxation of funds as applicable fund earnings

As the fund is not a 'foreign superannuation fund' and nor is the payment paid from a scheme for the payments of benefits 'in the nature of superannuation upon retirement or death', no part of any such lump sum is applicable fund earnings for the purposes of section 305-70 of the ITAA 1997.

Question 3

Is any part of the lump sum payment to you from XXXX assessable income under 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Detailed reasoning

Foreign trust income

A distribution from the XXXX may be subject to assessment under section 99B of the ITAA 1936.

The XXXX is a foreign trust as defined in subsection 481(3) 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 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.

The amount that represents the corpus of your Foreign Fund includes any amounts previously deposited into the fund by you and your employer. The lump sum may also include amounts that represent earnings of the fund. Fund earnings 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, paragraph 99B(2)(a) of the ITAA 1936 applies to you so that:

a)    The proportion of any lump sum that represents amounts previously deposited to the Foreign Fund by you and your employer is excluded from your assessable income, and

b)    The proportion of any lump sum that represents earnings of the Foreign Fund (from the commencement date) is included in your assessable income.

It should be noted that the benefit amount withdrawn from X country trust, prior to the deduction of tax, is the amount to be used in the calculated.

Question 4

Are the annuity payments made to you from the Foreign Fund assessable income under 99B of the ITAA 1936?

Detailed reasoning

Australian residents are taxed on their worldwide income. That is, they must declare all income received from Australian and foreign sources in their income tax return.

Section 27H of the ITAA 1936 operates to specifically include in assessable income, the amount of any pension derived by a taxpayer during a year of income reduced by the annual deductible amount.

The deductible amount is considered to be a return of part of the contributions that were made towards the purchase price of the pension and is calculated based on the undeducted purchase price of that pension.

In this case, a foreign pension received from the Foreign Fund is assessable income in accordance with section 27H of the ITAA 1936.

Under our tax treaties, foreign tax authorities tell us amount foreign source income paid to (and the tax withheld from) Australian resident taxpayers. We use that information to check tax returns, making sure you show your foreign income correctly on your tax return.

Undeducted purchase price (UPP) of a foreign pension or annuity

You may be entitled to claim a deduction to reduce the taxable amount of the pension or annuity income if your pension or annuity has a UPP. Only some foreign pensions and annuities have a UPP.

The UPP is the amount you contributed towards the purchase price of your pension or annuity, that is, your personal contributions.

That part of your annual pension or annuity income which represents a return to you of your personal contribution is free from tax. This tax-free portion is called the deductible amount of the UPP and it is usually calculated by dividing the UPP of your pension or annuity by a life expectancy factor, according to life expectancy statistics.

Double taxation agreement (DTA)

Tax treaties are formal bilateral agreements between two jurisdictions, Australia has tax treaties with more than 40 jurisdictions.

A tax treaty is also referred to as a tax convention or double tax agreement (DTA) They prevent double taxation or fiscal evasion and foster cooperation between Australia and other international tax authorities by enforcing their respective tax laws.

Australia currently holds a DTA with the X Country.

Foreign income tax offset

Section 770-10 of the ITAA 1997 provides that you are entitled to claim a foreign income tax offset for foreign income tax paid in respect of an amount that is included in your assessable income.

Section 770-15 of the ITAA 1997 specifies that foreign income tax means tax that is imposed under a law other than an Australian law and is:

•         tax on income

•         tax on profits or gains, whether of an income or capital nature, or

•         any other tax that is subject to an agreement covered by the International Tax Agreements Act 1953.

Article 23 of the DTA with X country requires Australia to provide Australian residents a credit against their Australian tax liability for X country tax paid in accordance with the tax treaty on income or gains derived from X country sources which are taxable in Australia.

If you are claiming a foreign income tax offset of more than $1,000, you will first need to work out your foreign income tax offset limit. The offset limit is based on a comparison between your tax liability and the tax liability you would have if certain foreign-taxed and foreign-sourced income and related deductions were disregarded.