Edited version of private advice

Authorisation Number: 1052371235626

Date of advice: 14 March 2025

Ruling

Subject: Foreign income - section 99B

Question 1

Are either of the foreign pension plans foreign superannuation funds for the purposes of Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Does the Convention between Australia and Country X for the avoidance of double taxation(the Convention) apply in respect of the foreign pension plans?

Answer 2

Yes.

Question 3

Does Article X of the Convention concerning pensions and annuities apply in respect to the following:

a)            pension payments from Plan 1?

b)            lump sum withdrawals from Plan 1?

c)            lump sum withdrawals from Plan 2?

Answer 3

a)            Yes.

b)            No.

c)            No.

Question 4

Does legisation of Country X Convention concerning 'Other income' apply to lump sum withdrawals from the foreign pension plans?

Answer 4

Yes.

Question 5

Are the pension payments taken from Plan 1 assessable as an annuity under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 5

Yes.

Question 6

Is any part of the lump sum withdrawals made from the foreign pension plans assessable under section 99B of the ITAA 1936?

Answer 6

Yes.

Question 7

Are both employee and employer contributions to the foreign pension plans considered part of the corpus and therefore excluded from assessable income under subsection 99B(2) of the ITAA 1936?

Answer 7

Yes.

Question 8

Are the annual earnings which are accumulated in Plan 2 assessable under section 99B of the ITAA 1936 in the year that the annual earnings are accumulated?

Answer 8

No.

Question 9

Is the non-assessable part of a withdrawal from the foreign pension plans considered target foreign income?

Answer

Yes.

Question 10

Are you entitled to a Foreign Income Tax Offset for Country X taxes paid on the part of the lump sum withdrawals from the foreign pension plans that are included in your assessable income under section 99B of the ITAA 1936?

Answer

Yes.

Question 11

Are you entitled to a Foreign Income Tax Offset for Country X taxes paid on the part of Plan 1 pension payments that are included in your assessable income under section 27H of the ITAA 1936?

Answer 11

No.

Question 12

Is the Country X social security benefit included in your assessable income under section 6-5 of the ITAA 1997?

Answer 12

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are a dual citizen of Australia and Country X.

You previously lived and worked in Country X for many years.

You are a member of two Country X pension plans.

The Plan 1 documentation indicates that benefits can be withdrawn after terminating employment with the employer, irrespective of age and whether you have retired.

The Plan 2 documentation indicates that benefits can be withdrawn while still employed under limited circumstances, and after terminating employment, irrespective of age and whether you have retired.

No employee contributions were required to be made to Plan 1.

You commenced receipt of a monthly pension from Plan 1. Country X income tax is withheld from the payments.

You did not take a lump sum at the commencement of your retirement.

All employer and employee contributions to Plan 2 were made prior to you returning to Australia.

Earnings on investments within Plan 2 are added to the account periodically and reinvested. The earnings are not distributed to you. Earnings are paid back into the plan to be reinvested.

You have been withdrawing funds from Plan 2. Country X income tax is withheld from withdrawals.

You are also in receipt of a social security benefit from Country X.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 subsection 6-10(4)

Income Tax Assessment Act 1997 section 10-5

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

Income Tax Assessment Act 1997 Subdivision 305 B

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1936 section 99B

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

Income Tax Assessment Act 1936 section 102AAM

Income Tax Assessment (1936) Act Regulations 2015 Regulation 19

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

A New Tax System (Family Assistance) Act 1999 section 5 of Schedule 3

International Tax Agreements Act 1953

Reasons for decision

Question 1

Foreign superannuation fund

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997as 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.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997, 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.

Superannuation fund

Division 305 of the ITAA 1997sets out the tax treatment of superannuation benefits received by individuals from non-complying superannuation plans. Subdivision 305-B deals specifically with superannuation lump sums received from foreign superannuation funds.

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

In accordance with subsection 10(1) of the SISA, 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. Federal Commissioner of Taxation (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. Federal Commissioner of Taxation (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'.

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.

A similar approach was adopted by Taylor J and Windeyer J who said:

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 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.

Senior Member O'Loughlin in Baker v FC of T 2015 ATC 10-399; (2015) AATA 469 (Baker) stated,

... 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.

In section 62 of the SISA, a regulated superannuation fund must 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; or

•                     attaining a prescribed age; and

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

Notwithstanding that 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 the Superannuation Industry (Supervision) Regulations 1994 (SISR)) 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 Scott and Mahony, 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 SISAand the SISR.

In this case:

•                     the Plan 1 documentation indicates that benefits can be withdrawn after terminating employment with MIT, irrespective of age and whether you have retired;

•                     the Plan 2 documentation indicates that benefits can be withdrawn while still employed at MIT under limited circumstances, and after terminating employment with MIT irrespective of age and whether you have retired.

As such, the payment of benefits in such circumstances is not in the nature of superannuation styled benefits permitted under the SISAand are not maintained solely for one or more of the core purposes outlined in the SISA.

Therefore, neither Plan 1 or Plan 2 meet the definition of being a foreign superannuation fund and are not foreign superannuation funds for the purposes of Subdivision 305-B of the ITAA 1997.

Question 2

Subsection 6-5(2) of the ITAA 1997provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

In determining liability to tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the (ITAA 1936) and ITAA 1997so that those Acts are read as one.

Schedule 2 to the Agreements Actcontains the Convention with Country X. The Convention operates to avoid the double taxation of income received by Australian and Country X residents.

As you are a resident of Australia for the purposes of the Country X Convention and have received, or will receive, an amount from an entity based in Country X, the Convention applies in respect of that income.

Question 3

Article X of the Country X Convention deals with pensions and annuities which are usually paid as an income stream.

In your case, you receive monthly pension payments from Plan 1 and therefore, Article X applies.

Paragraph (X) of Article X provides that pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.

However, another Article of the Convention allows either country to tax employment related pensions paid its citizens.

As a result, both countries may tax a non-government pension paid by Country X to a Country X citizen resident in Australia.

However, any lump sum payments received from the foreign pension plans are not pension payments or annuities and do not fall under Article X.

Question 4

The Country X Convention does not contain any articles that specifically relate to the receipt of funds from a foreign retirement or investment fund, therefore, Article X concerning 'Other income' is the relevant article.

Paragraphs (X) and (X) of Article X provide that income of a resident of one of the countries which is not dealt with in the foregoing Articles of the Convention will be taxable only in the country of residence. However, if such income is derived by a resident of one of the countries from sources in the other country, such income may also be taxed in the country in which it has its source.

Therefore, the Country X Convention allows both Australia and Country X to tax any withdrawals made from the Plans where lump sum payments are made.

Question 5

Foreign pension or annuity payments are not subject to tax under section 99B of the ITAA 1936. Instead, they are either included in assessable income as an annuity under section 27H of the ITAA 1936, or as ordinary income under section 6-5 of the ITAA 1997.

In your case, the pension payments received from Plan 1 are assessable as an annuity under section 27H of the ITAA 1936.

Section 27H allows a deduction for the 'undeducted purchase price' (UPP) of an annuity provided the exact amount of personal contributions to the fund can be ascertained. Only some foreign pensions and annuities have a UPP.

The ATO has a specific product where you can lodge a request to ask us to calculate the UPP for you - see Request for determination of the deductible amount for UPP of a foreign pension or annuity on ato.gov.au.

Questions 6, 7 and 8

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

Section 10-5 of the ITAA 1997lists certain statutory amounts that form part of assessable income. Included in the list are amounts received as a beneficiary of a trust pursuant to section 99B of the ITAA 1936.

Where foreign pension plans or funds do not meet the definition of 'foreign superannuation fund' in subsection 995-1(1) of the ITAA 1997, the funds are treated as foreign trust estates for which section 99B will apply to tax distributions made to, or for the benefit of, resident beneficiaries.

Subject to subsection 99B(2) of the ITAA 1936, subsection 99B(1) requires an Australian beneficiary to include in their assessable income an amount of trust property that is paid to, or applied for their benefit, provided the Australian beneficiary was resident at any time during the income year in which the payment or application was made.

Subsection 99B(2) of the ITAA 1936 reduces the amount included in assessable income under subsection 99B(1) by:

•                     for paragraph 99B(2)(a) - so much of the amount as represents corpus of the trust estate, except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer for a year of income, and

•                     for paragraph 99B(2)(b) - so much of the amount as represents an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income.

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'.

Taxation Determination TD 2024/9 Income tax: factors taken into account in applying paragraphs 99B(2)(a) and (b) of the Income Tax Assessment Act 1936 explains that corpus, in the context in which it is used in section 99B of the ITAA 1936 refers to trust capital which is represented by the assets of the trust, excluding income which has not been accumulated. In determining whether an amount distributed represents corpus, for the purposes of paragraph 99B(2)(a), regard is had to the trust property distributed.

Accumulated income is included in corpus, but it will be corpus which is attributable to amounts which would be included in assessable income if derived by a hypothetical resident taxpayer. Accordingly the amount assessed under subsection 99B(1) of the ITAA 1936 will not be reduced by an amount attributable to accumulated income under paragraph 99B(2)(a).

ATO Interpretation Decision ATO ID 2011/93 Income Tax: Application of section 99B of the Income Tax Assessment Act 1936 when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income provides the Commissioner's view of the operation of section 99B of the ITAA 1936in respect of the receipt of an amount that comprised solely of foreign interest income.

The Commissioner's view is that the entire amount of the payment is included in the beneficiary's assessable income under subsection 99B(1) of the ITAA 1936because:

•                     The conditions in subsection 99B(1) of the ITAA 1936are satisfied as the taxpayer has received an amount of trust property during an income year in which the taxpayer was a resident;

•                     Trust property paid to the resident beneficiary is attributable to foreign source income derived by the trust and none of the exclusions in subsection 99B(2) of the ITAA 1936apply to reduce the amount included in the assessable income of the beneficiary; and

•                     It is clear from the language of section 99B, and by inference from subsection 102AAM(5) of the ITAA 1936, that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust. Rather, the only explicit condition concerning residency is that the beneficiary be a resident at some time during the year of income in which the trust property is paid to them or applied for their benefit.

Application to your circumstances

In your case, the amount that represents the corpus of the Plans includes amounts previously deposited into the Plans by you and your employer.

Any lump sum distribution you receive may also include amounts that represent earnings of the Plans. Although the earnings may represent corpus, they are attributable to income derived by the Plans which would have been subject to tax had the earnings been derived by a resident taxpayer.

Further, Plan 2 earnings are not assessable income in the year they are added to your account in the Fund; instead, they are only assessable under section 99B of the ITAA 1936 when a withdrawal from the fund is made.

In summary, paragraph 99B(2)(a) of the ITAA 1936applies to you so that:

•                     the proportion of any lump sum payment that represents amounts previously deposited to the Plans by you or your employer is excluded from assessable income, and

•                     the proportion of any lump sum that represents Plan earnings (from the commencement date of the fund) is included in your assessable income.

Additional information

In addition to the amount assessable under section 99B of the ITAA 1936, you will also be liable for an interest payment as calculated under section 102AAM of the ITAA 1936.

The interest charge may apply to a distribution of profits from a non-resident trust estate to the extent the distribution was made from profits that:

•                     are referable to eligible designated concession income derived in an income year when the trust was a resident of a listed country, or

•                     were not subject to tax in a listed country and were derived in an income year when the trust was a resident of an unlisted country.

The amount on which interest is payable is worked out using the following formula:

(Distributed amount × applicable rate of tax) − FITO

The distributed amount is the amount of the distribution that is included in the taxpayer's assessable income under section 99B of the ITAA 1936. This amount is grossed up for any foreign tax claimable on that share.

The applicable rate of tax is the maximum marginal rate that applies for the income year of the taxpayer in which the trust distribution is received.

The foreign income tax offset is the amount the taxpayer can claim for foreign income tax paid on an amount included as assessable income for the distribution made by the non-resident trust.

For amounts paid out of income or profits accumulated, the interest period begins from the start of the income year following the income year it was accumulated.

Question 9

Target foreign income (TFI) is an element in the calculation of adjusted taxable income (ATI) which is used for determining eligibility for concessions and benefits, so the purpose of TFI is to include foreign economic benefits enjoyed by the individual.

TFI is defined in section 5 of Schedule 3 to A New Tax System (Family Assistance) Act 1999. Under paragraph (a) of the definition, TFI is the amount of the individual's foreign income (as defined in section 10A of the Social Security Act 1991) for the income year that is neither taxable income nor a fringe benefit.

Under paragraph (b), TFI also includes any amount that is not covered by paragraph (a) that is exempt from tax under section 23AF or 23AG of the ITAA 1936.

Section 10A of the Social Security Act 1991 (SSA 1991) provides that 'foreign income', in relation to a person, means:

a)            an income amount earned, derived or received by the person from a source outside Australia for the person's own use or benefit; or

b)            a periodical payment by way of gift or allowance from a source outside Australia; or

c)             a periodical benefit by way of gift or allowance from a source outside Australia.

In relation to paragraph 10A(a) of the SSA 1991, subsection 8(1) of the SSA 1991states that:

income amount means:

a.            valuable consideration; or

b.            personal earnings; or

c.            moneys; or

d.            profits

(whether of a capital nature or not).

You will receive, lump sum withdrawals from the foreign Plans for your own use and benefit. Therefore, the non-assessable part of a withdrawal is considered TFI under paragraph 10A(a) of the SSA 1991.

Questions 10 and 11

Section 770-10 of the ITAA 1997provides that a FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

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.

Where 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 paid (the share that corresponds to the part that is assessable income) can be claimed.

Foreign Income Tax Offsets are subject to the offset limit outlined in subdivision 770-B of the ITAA 1997.

Article X of the Country X Convention provides that Australia will allow a credit for Country X tax (other than Country X tax imposed solely by reason of citizenship) on income derived by a resident of Australia from sources in Country X.

Article X provides that where Country X tax is imposed by reason of citizenship, Country X will allow a tax credit for Australian tax paid on the amount.

In your case:

•                     You are entitled to claim a foreign income tax offset that corresponds to the foreign tax paid on the proportion of any lump sum withdrawal that is included in your assessable income.

•                     You are not entitled to claim a foreign income tax offset in relation to the Plan 1 pension payments you receive because these payments are taxed in Country X by reason of your Country X citizenship. Instead, you must apply for a tax credit against your Country X tax for Australian tax paid on the pension payments.

•                     No foreign income tax offset is claimable on the employer contributions to the plan, employee contributions to the plan, or the annual earnings accumulated in the account as they are not assessable in Australia.

Question 12

Article X of the Country X Convention provides that social security payments by Country X to a resident of Australia shall only be taxed in Country X.

Therefore, the social security benefits you receive are not assessable income under section 6-5 of the ITAA 1997.