Private ruling: Lump sum transfer from a foreign fund
Date of advice: 6 August 2018
Published: September 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is any part of a lump payment received from overseas retirement saving plans assessable as applicable fund earnings as worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: If the answer to Question 1 is yes, will any applicable fund earnings you choose to be treated as assessable income by your SMSF counts towards your concessional contribution cap? | A2: Not Applicable | Q3: Will any part of the lump sum payment received from the overseas retirement savings plans be included in your assessable income under sections 97 and 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: Yes.

Relevant facts and circumstances: You ceased employment overseas in 2010. You became an Australian resident for tax purposes in 2010. You held accounts in overseas registered retirement savings plans (RRSPs), hereafter referred to as the Plans. You state that the value of your benefits in the Plans on the day before you became an Australian resident for tax purposes was a certain figure. In 201X you withdrew all the funds from your Plans. The amount was transferred to an Australian superannuation fund. You no longer hold an interest in the Plans. You have not made any contributions to the Plans since becoming a resident of Australia. In your application for a Private Ruling you advised that the Plans allow for access of benefits prior to retirement age, i.e. it is not a ‘locked in’ RRSP.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1936 Subsection 99B(1) | Income Tax Assessment Act 1936 Subsection 99B(2) | Income Tax Assessment Act 1936 Subsection 481(3) | 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 Subdivision 305-B | Income Tax Assessment Act 1997 Section 305--55 | Income Tax Assessment Act 1997 Section 305-70 | 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

Reasons for decision: Summary: A lump sum payment from a foreign superannuation fund can be made to an individual or to your complying Australian superannuation fund. In this instance the lump sum payment from the Plans will not be considered a payment from a ‘foreign superannuation fund’, therefore, subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) has no application in this case. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds. Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death. Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income. Before determining whether an amount is 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. | 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. 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 ‘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 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. | Detailed Reasoning - Registered Retirement Savings Plan (RRSP): An RRSP is a retirement savings plan that is registered under the tax law provisions of an overseas country. Any income earned in the RRSP is usually exempt from that country’s tax for the period the funds remain in the plan. A plan participant may make contributions to the RRSP up until the year in which the plan participant turns age 71. A deduction up to prescribed limits may be claimed under that country’s income tax act for contributions made to the RRSP. Withdrawals from the RRSP can be made at any time. However, the withdrawal is subject to that country’s income tax in the year in which the withdrawal is made. In the year in which the plan participant turns age 71 the funds in the RRSP must be: ● withdrawn; ● transferred to a registered retirement income fund (RRIF); ● used to purchase an annuity for life; or ● used to purchase an annuity for a fixed term. You have indicated that the benefits in your RRSPs, the Plans, can be accessed for pre-retirement purposes. Therefore, your Plans do not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes. As such, on the basis of the information provided, the Commissioner considers that the lump sum payment from the Plans was not transferred from a ‘foreign superannuation fund’ as defined in subsection 995-1(1) of the ITAA 1997. Consequently, Subdivision 305-B of the ITAA 1997 does not apply to the lump sum payment that you received from the Plans. | Detailed Reasoning - Question 2: As the entity making the payment is not a foreign superannuation fund, Subdivision 305-B of the ITAA 1997 does not apply to the lump sum payment that you received from your Plans. There are no applicable fund earnings; therefore the payment will not have any impact on your concessional contribution cap. | Detailed Reasoning - Question 3: A foreign trust is defined in subsection 481(3) of the Income Tax Assessment Act 1936 (ITAA 1936) as a trust which is not an Australian trust, and which did not result from a will or an intestacy in relation to the estate of a deceased person. You had RRSP accounts in an overseas country. A RRSP is a personal savings plan that gives you tax advantages for setting aside money for retirement. The RRSPs are set up for the exclusive benefit of you or your beneficiaries. The RRSPs are foreign trusts as defined in subsection 481(3) of the ITAA 1936 and are therefore a foreign investment funds (FIFs). The RRSPs are not superannuation funds for the purposes of the ITAA 1997 and the ITAA 1936 as they allow for withdrawals for pre-retirement purposes. Therefore the RRSPs are not established solely for the provision of retirement benefits. Repeal of FIF measures On 14 July 2010, the FIF measures were repealed and do not apply from the 2010-11 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). In this case, you have withdrawn from your RRSP accounts. When you withdraw from the RRSPs, income has been paid to you or applied for your benefit. Therefore, any income that is accumulated in the RRSPs is assessable to you when you withdraw the funds. The accumulated assessable income is the difference between the value of your RRSPs on the date you became an Australian resident and value at redemption.