Edited version of your written advice

Authorisation Number: 4140048084041

Date of advice: 22 March 2018

Ruling

Subject: Lump sum payment on termination – foreign employer

Question 1

Is the lump sum payment received from your employer tax free in accordance with Subdivision 305-B of the Income Tax Assessment Act 1997?

Answer

No

Question 2

Does section 83-235 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to an employment termination payment made to your client in consequence of the termination of their employment overseas?

Answer

Yes

This ruling applies for the following period:

Period ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You were employed by a company which is a foreign company.

You were employed from 2013 until 2016 when your contract of employment terminated.

You became a member of the pension plan as a requirement of the contract of employment in 2013.

During the time you worked in country A you were not a resident of Australia for taxation purposes.

The Plan brochure states that the benefits in the Plan may only be paid to a member in the following circumstances:

(a) upon termination of employment with the Employer;

(b) permanent disability;

(c) retirement; or

(d) death.

The Plan brochure also states,

‘…the company will credit 8% of your base salary and bonus paid in the prior year (converted to U.S dollars) to your GPP account each January. This benefit is paid entirely by the company; there are no employee contributions. Each year, your account will be credited with earnings at a rate equal to the U.S Prime Rate in effect as of December 31^st of the prior plan year, but no greater than 6%’

Additionally, the Plan Brochure states, ‘All payments are made from the Company’s general assets’.

You returned to Australia in 2016 and were considered a resident of Australia for taxation purposes from that date.

You received a lump sum payment of paid by the Plan into your bank account in October 2016.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 83-D:

Income Tax Assessment Act 1997 Section 83-235

Income Tax Assessment Act 1997 subdivision 305-B

Income Tax Assessment Act 1997 section 305-60.

Income Tax Assessment Act 1997 section 305-70.

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

Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision

Lump sum payments from foreign superannuation funds

Subdivision 305-B of the ITAA 1997 deals with the tax treatment of superannuation benefits paid from certain foreign superannuation funds.

In accordance with section 305-60 of the ITAA 1997, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income.

If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 applies to include the applicable fund earnings (if any) in the person’s assessable income.

Before determining whether an amount is exempt under sections 305-60, or 305-65 of the ITAA 1997, or assessable under section 305-70, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund, then subdivision 305-B will not apply.

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.

Relevantly, subsection 295-95 (2) of the ITAA 1997 defines an 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 …

Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would not qualify as an Australian superannuation fund and would, therefore be a foreign superannuation fund in accordance with subsection 995-1(1) of the ITAA 1997.

Meaning of ‘superannuation fund

Subsection 995-1 (1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), that is:

(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. Commissioner of Taxation of the Commonwealth (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’ such as the example given by Justice Kitto of a funeral benefit.

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.

In accordance with section 62 of the SISA (Sole purpose test), a regulated superannuation fund must be maintained solely for the provision of benefits specified in subsection 62(1) of the SISA. The ‘core purposes’ specified in that subsection relate to providing retirement or death benefits for, or in relation to, fund members; and the ‘ancillary purposes’ relate to the provision of benefits on the cessation of a member's employment and other death benefits and other approved benefits.

Notwithstanding 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) 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 SISA.

Generally, a superannuation fund is a fund established as a legal trust with the purpose of providing benefits to fund members in the event of illness, disability, or retirement of a member. In the event of the death of a member a superannuation fund may also provide benefits to dependants of the deceased member.

The essential characteristics of a superannuation fund include a separate and identifiable fund of money or investments set aside and invested to earn income and/or capital growth for the purpose of providing benefits to participating members upon retirement after a prescribed age.

It is noted that all payments from the Plan are made from the Employer’s general assets and that the Plan does not require the Employer to maintain a separate fund or segregate any assets to assure future distributions to participants. It is also noted that no cash contribution from the Employer or any participant is required or permitted. The fact that no contributions are made for or on behalf of participants in the Plan, and no fund of money and investments is maintained for the provision of future benefits, indicates that the Plan does not demonstrate the essential characteristics of a superannuation fund.

Consequently, Subdivision 305-B of the ITAA 1997 does not apply to the lump sum payment.

Question 2

Summary

The Benefit received by you is a foreign termination payment under section 83-235 of the ITAA 1997 and is not assessable income and is not exempt income.

Detailed reasoning

Foreign termination payments are governed by Subdivision 83-D of the Income Tax Assessment Act 1997 (ITAA 1997). There are two types of foreign termination payments covered by Subdivision 83-D:

● termination payments relating to a period when the taxpayer was not an Australian resident, and

● termination payments relating to a period when the taxpayer was an Australian resident.

Termination payment: Foreign resident period

Section 83-235 of the ITAA 1997 is the operative provision in respect of termination payments relating to a period when the taxpayer was not an Australian resident. It states:

A payment received by you is not assessable income and is not exempt income if:

(a) it was received in consequence of the termination of your employment in a foreign country; and

(b) it is not a superannuation benefit; and

(c) it is not a payment of a pension or an annuity (whether or not the payment is a superannuation benefit); and

(d) it relates only to a period of employment when you were not an Australian resident.

In this case you received an employment termination payment in October 2016 in relation to your employment in a foreign country. You were not a resident of Australia for tax purposes from September 2013 until September 2016. Therefore, the payment relates solely to a period of employment when you were not an Australian resident.

Further, the payment is not a superannuation benefit or payment of a pension or annuity.

Consequently, the payment received by you is a foreign termination payment under section 83-235 of the ITAA 1997 and is not assessable income and is not exempt income.