Edited version of your written advice

Authorisation Number: 5010047775306

Date of advice: 20 March 2018

Ruling

Subject: Foreign income

Question

Do the Transferor Trust provisions apply to the Plan?

Answer

No.

Question

Will section 99B apply to the withdrawal of funds from the Plan?

Answer

Yes.

Question

Will specific contributions to the fund form part of the corpus of the fund?

Answer

Yes.

Question

Will the payment from the Plan be considered a payment from a “foreign superannuation fund” for the purposes of Subdivision 305-B?

Answer

No.

Question

Will the payment from the Plan be considered an Eligible Termination Payment?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2018

Year ended 30 June 2017

Year ended 30 June 2016

Year ended 30 June 2015

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You are an Australian resident for tax purposes.

You were an employee of the company for a number of years.

You participated in their Plan.

The Plan is designed to help employees plan for retirement and meet their long-term savings goals.

The company acts as the Trustee for the plan, and ensures the plan is administered in accordance with the governing regulations, the Trust Deed and Plan Rules.

You were/are not a shareholder or director or in a position to otherwise influence the Trustee.

While you were employed you made personal contributions from your post-tax earnings to the plan. Under the plan rules, your employer would match these contributions on a dollar for dollar basis up to a maximum limit of 5%.

The plan only allows participants to withdraw their savings in the following circumstances:

● When the participant retires from working; and/or

● When the participant ceases to be employed by the employer

● Special circumstances, including hardship circumstances, or when the employee reaches the age of 59.

Once a participant ceases to be employed by the employer (or any entity of the employer), they are no longer able to contribute to the plan. However, a participant who is no longer employed has a choice of:

● Withdrawing the funds; or

● Keeping the account invested, although the funds must eventually be withdrawn one the participant reaches the age of 70.

You have ceased employment with your employer and plan to withdraw the balance of the plan in cash.

The funds will not be transferred to and Australian superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 102AAG

Income Tax Assessment Act 1997 section 6-5

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

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 6-10(2)

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

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1936 subsection 97

Income Tax Assessment Act 1936 subsection 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Section 305-55

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

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

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Section 82-135

Reasons for decision

Transferor Trust provisions

Section 102AAG is relevant to determining whether a taxpayer is in a position to control a trust estate, for the purposes of Division 6AAA.

An entity is taken to be in position to control a trust estate if a group in relation to the entity is able to remove or appoint the trustee, or any of the trustees, of the trust estate. A ‘group’ in this context includes the entity acting alone.

Accordingly, you were not in a position to control the trust in the relevant income years, therefore, the Transferor Trust provisions do not apply.

Section 99B

The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)).

The withdrawal from the foreign funds would not be ordinary income (subsection 6-5(2) of the ITAA 1997).

‘Statutory income’ is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with receipt of trust income not previously subject to tax.

Section 97 of the ITAA 1936 provides that a beneficiary of a trust estate who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution 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.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents either:

● the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)

● amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and

● amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936).

Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).

Examples of corpus in a foreign fund of this type would be contributions made by the employee or employer to the fund. Also transfers into the fund from similar funds before the taxpayer became a resident would be corpus.

Any income earned in the fund including interest, dividends, gains on the sale of investments over the life would have been assessable by a resident taxpayer and not reduce the amount included under 99B(1).

In the your case, as the withdrawn amounts are a distribution from a trust, any amounts distributed (withdrawn) or credited from the foreign fund are assessable under subsection 99B(1) of the ITAA 1936.

Subject to the exclusions under subsection 99B(2) of the ITAA 1936 you are assessable on the following:

● Rebate of management charges,

● change in value of investments, and

● investments transferred in.

The corpus of the fund is comprised of the following:

● Employee contributions,

● employer contributions, and

● profit share/bonus contributions.

Foreign superannuation fund

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.

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1

Relevantly, 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 …

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1

Thus, 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 provides that:

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’ such as the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kitto’s judgment 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, a regulated superannuation fund must be 'maintained solely' for one or more of the 'core purposes'; or one or more of the ‘core purposes’ and one or more of the ‘ancillary purpose’, namely for the provision of benefits to a member on or after:

● retirement from gainful employment; or

● attaining a prescribed age; or

● the member's death (this may require the benefits being passed on to a member's dependents or legal representative); or

● the termination of member’s employment with an employer who had, at any time, contributed to the fund in relation to the member; or

● the member’s cessation of work for gain or reward on account of ill-health.

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 (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 SISA and the SISR.

In this case, information available indicates that as well as providing benefits on retirement, invalidity and death, the Fund also allows participants to withdraw their savings when the participant ceases to be employed by the Employer (or any entity of Diamond Offshore).

Because the benefits in the Fund are also paid for other than retirement purposes, the Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

It follows that if the Fund is not a ‘superannuation fund’, it cannot be a ‘foreign superannuation fund’. Consequently, subdivision 305-B of the ITAA 1997 does not apply to the lump sum received by the Taxpayer from the Fund.

Employment termination payments

By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which states that a payment is an employment termination payment (ETP) if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Therefore, a payment will be an ETP if all the conditions in subsection 82-130(1) of the ITAA 1997 are satisfied. Failure to satisfy any one of the conditions under subsection 82-130(1) will result in the payment not being treated as an ETP.

Paid ‘in consequence of’ the termination of employment

The phrase ‘in consequence of’ is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account court decisions on the meaning of the phrase, the Commissioner’s view on the meaning and application of the ‘in consequence of’ test are set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

While TR 2003/13 considered the meaning of the phrase ‘in consequence of’ in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 (ITAA 1936) and the current provision under the ITAA 1997 both use the term ‘in consequence of’ in the same manner.

In paragraphs 5 and 6 of TR 2003/13 the Commissioner states:

5. … a payment is received by a taxpayer in consequence of the termination of the taxpayer’s employment if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been received by the taxpayer.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In this instance, you have ceased employment with your employer and intend to withdraw the balance of the Plan in cash.

While the termination of employment gives you the right to access the funds in the Plan, you are not obliged to do so. Under the rules of the Plan, employees may choose, upon termination, to either withdraw their benefits immediately, or elect to keep the money invested in the Plan until they reach 70 years of age.

Relevantly, in paragraph 8 of TR 2003/13 the Commissioner states:

8. Where, after the date of termination, a taxpayer obtains the right to commute a pension to a lump sum, the payment resulting from exercising that right would not be one that is received in consequence of the termination of employment. The payment does not 'follow on as an effect or result of' the termination. The obtaining of the right to commute is an intervening event which makes the causal link between the termination and payment too remote.

Therefore, it is considered that the payment to be received by you will not be made in consequence of the termination of your employment with your employer. Rather, the Payment to be received by you will be received in consequence of you exercising your rights to access your benefits in the Plan. Hence, subparagraph 82-130(1)(a)(i) of the ITAA 1997 is not satisfied.