Private ruling: Lump sum transfer from a foreign fund
Date of advice: 25 July 2019
Published: September 2019
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of the lump sum benefit received by the taxpayer from a foreign pension fund included in their assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is any part of the lump sum benefit received by the taxpayer from a foreign pension fund included in their assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes

Relevant facts and circumstances: The Taxpayer became a permanent resident of Australia in the 2017-18 income year. The Taxpayer held an interest in the Foreign Fund, which was established and has its head office, central management and control in a foreign country. The document (the Information Leaflet) states, at Part I (page 2): PAYMENT OF BENEFITS (a) If the cessation of a Participant's employment is due to any one of the following events, the Participant or Beneficiary shall receive the total accrued benefit: i) Normal Retirement; ii) Old Age Retirement; iii) Permanent Loss of Work Capacity iv) Serious Illness; v) Death (b) If the cessation of a Participant's employment is due to reasons other than a) above, the Participant shall receive or request to transfer to a new pension fund, the portion of accrued benefit which shall comprise the total of the Participant's own contributions and a percentage of the Associate's contributions, if any, as specified below: Completed years of service based on Date of Employment Vesting percentage (%) Less than 3 year 0 3, but less than 4 50 4, but less than 5 60 5, but less than 6 70 6, but less than 7 80 7, but less than 8 90 8, but less than 9 100 9, but less than 10 100 10 or more 100 During the 20XX-XX income year, the Taxpayer's vested balance in the Foreign Fund comprising employer voluntary contributions and his member voluntary regular contributions were paid to the Taxpayer as a lump sum. There was an unvested balance of employer voluntary regular contributions.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75 | Income Tax Assessment Act 1997 subsection 305-75(3) | Income Tax Assessment Act 1997 paragraph 305-75(3)(a) | Income Tax Assessment Act 1997 paragraph 305-75(3)(b) | Income Tax Assessment Act 1997 paragraph 305-75(3)(c) | Income Tax Assessment Act 1997 paragraph 305-75(3)(d) | Income Tax Assessment Act 1997 section 305-80 | Income Tax Assessment Act 1997 section 960 -50 | Income Tax Assessment Act 1997 subsection960-50(1) | Income Tax Assessment Act 1997 subsection960-50(4) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 section 99B | Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 subsection 99B(2) | Income Tax Assessment Act 1936 paragraph 99B(2)(a)

Reasons for decision: Summary: The Foreign Fund is not a foreign superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997. Therefore, subsection 305-70(2) of the ITAA 1997 does not apply in this instance and no part of the lump sum received by the Taxpayer from the Foreign Fund is included in the Taxpayer's assessable income for the 2018-19 income year. | 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 ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable income. The applicable fund earnings is 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. *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. | 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 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 Foreign Fund also allows members to access their benefits (or a percentage of their benefits) upon voluntarily resigning from the parent company at any age, and not merely on retirement. 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. It follows that if the Foreign Fund is not a 'superannuation fund', it cannot be a 'foreign superannuation fund'. Consequently, subsection 305-70(2) of the ITAA 1997 does not apply to the lump sum received by the Taxpayer from the Foreign Fund; and no amount of the lump sum is included in their assessable income as the applicable fund earnings amount in respect of the lump sum received. | Detailed Reasoning - Question 2: A fund in the nature of a retirement or investment plan/fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder. Section 99B of the ITAA 1936 deals with the receipt of trust income 'not previously subject to tax' in Australia and applies where an Australian resident taxpayer receives a lump sum payment from a foreign retirement or investment fund. Section 99B takes precedence over section 97 of the ITAA 1936 in assessing these types of payments. Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust who was a resident at any time during the year of income, the amount is to be included in the assessable income of the beneficiary. However, 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 is not to include any amount that represents the corpus of the trust, but not an amount that is attributable to income of the trust which would have been included in the assessable income of a resident taxpayer if it had been derived by that taxpayer. Consequently, the assessable amount is the total amount received less any amounts deposited to the fund (the corpus) by the taxpayer, or on their behalf. The rule is that the taxpayer is taxed only on the earnings of the investment on withdrawal, not on the corpus returned to them. Any earnings in the funds are only assessable in Australia on withdrawal from the funds. The whole amount of the earnings is assessable in Australia not just the earnings that accrued from when the Taxpayer became a resident of Australia for taxation purposes. This is consistent with the Commissioner's view in ATOID 2011/93. The earnings must be included in the Taxpayer's Australian tax return in the year he withdraws the lump sum amount from the fund.