Edited version of private advice

Authorisation Number: 1052338678514

Date of advice: 3 December 2024

Ruling

Subject: Superannuation lump sum withdrawal

Question

Will Article X of the Convention between Australia and Country A for the Avoidance of Double Taxation with respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion (the DTA) apply to treat the proposed lump sum withdrawal from the Fund as non-taxable in Australia?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trustee is a company incorporated in and with its registered office in Country A. The directors of the Trustee are XX Country A tax residents.

The Trustee administers a superannuation and pension fund (the Fund) to provide individual personal benefits, pensions or retiring allowances for employees and other persons who are eligible to join the Fund, investing in offshore international assets.

At the time the Trustee was incorporated, and the Fund was established, there were no Australian assets, and at all times since establishment, central management and control has been outside Australia.

The Fund is governed by a deed.

The Fund is established to create one or more separate portfolios of investments for each member. Each member's portfolio or portfolios shall be administered under a separate trust for that member.

Except as provided for above, the Fund shall not provide facilities for members of the Fund to participate as beneficiaries in income or gains arising from the Fund and investments made on behalf of one beneficiary shall not be pooled with investments made on behalf of any other beneficiary.

A member is defined under the Deed as a person who has been admitted to membership of the Fund under Schedule 1 who has not ceased to be a member. Rule 1.31 of Schedule 1 prohibits a Country A resident person from becoming a member of the Fund and disallows an existing member to continue to be a member should they subsequently become a Country A resident.

Pursuant to Clause 3.2 of the Deed, a member may receive a benefit from the Fund in accordance with the rules contained in Schedule 1.

Rule 2 of Schedule 1 of the Deed sets out circumstances which entitle members to a benefit payment. Specifically rule 2.1 of Schedule 1 of the Deed entitles a member who has reached the normal retirement age and, if employed, has left service, to a benefit equal to the accumulated credit.

Accumulated credit is defined under Clause 1.1 of the Deed as the total balances of the employee accounts of a member.

An employee account is defined under Clause 1.1 of the Deed as an account required to be kept in respect of a member.

Normal retirement age of a member means the normal age of retirement as determined by the Trustee from time to time.

On XX XX 20XX, Person A and Person B became members of the plan.

A separate sub fund was established to hold your entitlements.

At the time you became a member of the Fund, you were not a resident of Country A for tax purposes. Person A and Person B were Australian residents for income tax purposes at the time they became members of the Fund.

Prior to becoming a resident of Australia for tax purposes on XX XX 20XX, Person A resided in Country A for approximately XX years. Person A is currently an Australian resident for tax purposes and has been since XX XX 20XX.

Prior to becoming a resident of Australia for tax purposes on XX XX 20XX, Person B resided in Country A for approximately XX years. Person B is currently an Australian resident for tax purposes and has been since XX XX 20XX.

Person A was born on XX XX 19XX and retired during 20XX, aged XX.

Janet was born on XX XX 19XX and retired during 20XX, at age XX.

You did not make a benefit payment request from the Fund before the age of 65.

As 65 years of age is the age at which a Country A state pension is payable, the Trustee was not required to determine your 'normal age of retirement'.

According to Clause 6.1 of the Deed, benefit payment requests must be made in writing in writing to the Trustee, and the Trustee shall determine whether the benefit shall be paid wholly or in part as a lump sum payment, and the Trustee shall also have the power to determine the source of such payment.

Person A and Person B propose to withdraw a lump sum benefit of $X,XXX,XXX each, from the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 305

Reasons for decision

Detailed reasoning

Division 305 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the tax treatment of superannuation benefits received by taxpayers from non-complying superannuation plans, including lump sum payments from foreign superannuation funds. The assessment of such lump sums are subject to the operation of Australia's international tax treaties.

Article x of the Convention between Australia and Country A for the Avoidance of Double Taxation with respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion [2010] ATS 10 (the DTA) provides that:

Lump sums arising in a Contracting State and paid to a resident of the other Contracting State under a retirement benefit scheme, or in consequence of retirement, invalidity, disability or death, or by way of compensation for injuries, shall be taxable only in the first-mentioned State.

Paragraph 2.292 of the Explanatory Memorandum to the International Tax Agreements Amendment Bill (No. 1) 2010 (the EM) sets out the delegations' consideration of the phrase 'retirement benefits scheme' in the course of negotiations for the DTA:

It is understood that the term 'retirement benefit scheme' means an arrangement in which the individual participates in order to secure retirement benefits. In the case of payments arising in Australia a retirement benefit scheme includes a superannuation fund and a retirement savings account and in the case of New Zealand includes any superannuation scheme ...

The term 'superannuation scheme' is defined in the Income Tax Act 20xx (Country A) as meaning, amongst other things:

i.  a trust or unit trust established by its trust deed mainly for the purpose of providing retirement benefits to beneficiaries who are natural persons or paying benefits to superannuation funds ...

Paragraph 2.294 of the EM notes the delegations' understanding of where lump sums arise:

It is understood that pensions, other similar periodic remuneration and lump sums referred to in Article 18 will arise where the fund is established or, in the case of such income paid by the Government of a Contracting State, in that State.

Application to your circumstances

The Fund falls within the definition of 'retirement benefit scheme' as outlined in paragraph 2.292 of the EM.

The proposed payment of $XX from the Fund is a lump sum that arises in Country A.

Article 18(2) of the DTA allocates the taxing right of this lump sum to Country A, the country in which it arose.

As a result, the lump sum will not form part of your assessable income in Australia.