Edited version of private advice

Authorisation Number: 1052335962855

Date of advice: 9 December 2024

Ruling

Subject: Foreign superannuation fund

Question

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

Answer

No.

This ruling applies for the following period:

Income year ending 30 June 2024

The scheme commences on:

1 July 2023

Relevant facts and circumstances

1.    The Taxpayer is a member of the XXXX.

2.    The Taxpayer became an Australian resident for tax purposes on XX December 20XX

3.    A XXX is a type of tax-advantaged retirement plan for state and local government and non-profit organisations.

4.    On X February 20XX a lump sum of $XXX,XXX was made to the Taxpayer.

5.    Under the XXX conditions of membership, before retirement a member can:

•         withdraw funds from the XXX before age 59½ penalty-free if you're no longer employed by the plan sponsor.

•         The withdrawal must be taken as a lump sum amount.

•         make a withdrawal if you qualify for an unforeseeable emergency distribution, where you can withdraw funds early penalty-free while still being employed by the plan sponsor. Generally, these are allowed if you're impacted by an event beyond your control that you couldn't plan for, such as an illness, accident, or natural disaster, and you've exhausted other financial options.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Section 305-80

Income Tax Assessment Act 1997 Section 960-50

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

Reasons for decision

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 XXXX 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.

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.

In this case, the Taxpayers XXX plan allows for withdrawal of benefits upon termination of employment and for unforeseeable emergencies.

Whilst the XXXX provides its 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 XXXX sole purpose. The XXXX also provides benefits that are inconsistent with it being a 'provident, benefit, superannuation, or retirement fund.

Accordingly, in circumstances where the XXX permits the withdrawal of benefits for purposes not solely consistent with the fund being a 'superannuation fund', the XXXX cannot be a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Foreign trust income

A distribution from the XXX may also 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 the Taxpayers XXXX includes any amounts previously deposited into the fund by the Taxpayer and the 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 XXX by the Taxpayer and their employer is excluded from the Taxpayers assessable income, and

b)     The proportion of any lump sum that represents earnings of XXXX (from the commencement date) is included in the Taxpayer's assessable income.

It should be noted that the benefit amount withdrawn from the Taxpayer's XXXX, prior to the deduction of tax, is the amount to be used in the calculations.