Private ruling: Lump sum payment from a foreign superannuation fund
Date of advice: 12 February 2016
Published: April 2016
Ruling period: Income year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is any part of the benefit to be received by you from a foreign pension scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will a portion of the proposed lump sum payment from the foreign fund, a pension scheme in a foreign country (the Foreign Fund) be included in your assessable income? | A2: Yes.

Relevant facts and circumstances: You became a permanent resident of Australia on a date in the XXXX-YY income year. You hold an interest in a pension scheme in a foreign country (the Foreign Fund). You have supplied correspondence from the Foreign Fund which provides the conditions of withdrawal from the Foreign Fund and states: Your contributions go into three accounts: • Ordinary Account - the savings can be used to buy a home, pay for insurance, investment and education • Special Account - for old age and investment in retirement-related financial products. • Medical Account - the savings can be used for hospitalisation expenses and approved medical insurance. You did not roll over your benefits into an Australian superannuation fund upon returning to Australia. You plan to withdraw your benefits in the Foreign Fund in the future. The Foreign Fund has advised that they are not able to roll over your benefits to an Australian superannuation fund, but can only make payment to a personal private bank account.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-10 | 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 section 301-10 | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75 | Income Tax Assessment Act 1997 section 960-50 | Income Tax Assessment Act 1997 subsection 960-50(1) | Income Tax Assessment Act 1997 subsection 960-50(4) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 paragraph 99B(2)(a) | Income Tax Assessment Act 1936 subsection 481(3) | Superannuation Industry (Supervision) Act 1993 section 10 | Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision: Summary: The Foreign Fund does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) will not have any application in this instance. The Fund is a foreign trust as defined in subsection 481(3) of the ITAA 1936 and is therefore a foreign investment fund (FIF). The portion of your withdrawal that relates to income accumulated in the foreign fund will be assessable in Australia. | Detailed Reasoning - Lump sum payments from foreign superannuation funds:: 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 Income Tax Assessment Act 1997 (ITAA 1997) will operate to include the applicable fund earnings in the person's assessable income. The applicable fund earnings are the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. However, before determining whether an amount is assessable under subsection 305-70(2) of the ITAA 1997, 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 subsection 305-70(2) will not have any application. | 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 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 '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. 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. | Detailed Reasoning - 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. | Detailed Reasoning - 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 section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the 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 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 Foreign Fund also provides benefits for purposes such as: • to pay medical costs incurred by the Participant, including medical insurance and hospitalisation expenses; • to purchase the Participants home; or • to pay education expenses. Because the benefits in the Foreign Fund are also paid for other than retirement purposes, the Foreign Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes. Accordingly, the Foreign Fund does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance. | Detailed Reasoning - Tax consequences of proceeds from a foreign trust: The Commissioner considers that the overseas fund is not a 'foreign superannuation fund' as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The overseas fund is a foreign trust as defined in subsection 481(3) of the Income Tax Assessment Act 1936 (ITAA 1936) and is therefore a foreign investment fund (FIF). Repeal of FIF measures On 14 July 2010, the FIF measures were repealed and do not apply from the XXXX-YY income year onwards. If you have an interest in a FIF, you will be subject to the general tax rules applicable to your circumstances - for example, the general tax rules relating to trust income. Assessability of trust income Section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year. Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the ITAA 1936. 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, the 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). Application to your circumstances In this case, you plan on withdrawing your interest in the Foreign fund during the XXXX-XX financial year. A withdrawal of an amount that represents amounts deposited by you would come within paragraph 99B(2)(a) of the ITAA 1936. Distributions, to the extent that they come within subsection 99B(2) of the ITAA 1936, would be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936. However, the income accumulated in the fund (paid to you as a resident taxpayer) that is normally taxable in Australia and had not been previously subjected to tax in Australia would be assessable to you under subsection 99B(1) of the ITAA 1936. | Detailed Reasoning - Additional information: If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation. You can claim a tax offset for the foreign tax you have paid on income, profits or gains (including gains of a capital nature) that are included in your Australian assessable income. In some circumstances, the offset is subject to a limit. To be entitled to a foreign income tax offset: • you must have actually paid, or be deemed to have paid, an amount of foreign income tax • the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes. Calculating the offset If you are claiming a foreign income tax offset of more than $1,000, you will first need to work out your foreign income tax offset limit. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreign-taxed and foreign-sourced income and related deductions were disregarded. For more information, refer to the Guide to foreign income tax offset rules 2013-14 available at www.ato.gov.au.