Private ruling: Payment from an overseas fund
Date of advice: 10 December 2015
Published: February 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Will any part of the amount to be transferred from your overseas pension fund account (pension fund) to your overseas bank account be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will any part of the amount to be transferred from the pension fund to your overseas bank account be assessable under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes. | Q3: Will you be entitled to receive a foreign income tax offset in relation to any overseas tax paid on the intended transfer from the pension fund? | A3: Yes. | Q4: Will any part of the amount to be transferred from your overseas bank account to Australia be assessable income? | A4: No.

Relevant facts and circumstances: You became a permanent tax resident of Australia in 200X. You opened a superannuation account with the overseas pension fund in 20XX and transferred an amount into the pension fund from another overseas superannuation account. No other transfers or contributions were made to the pension fund after you joined the scheme. In 20YY, you provided a copy of the pension fund's regulations. According to regulation 9, the accountholder may withdraw funds from the pension fund: • at the earliest, five years before and, at the latest, five years after attainment of the normal retirement age (65 for men); • if the accountholder receives a full disability pension; • if the accountholder is leaving that country definitively; • if the accountholder becomes self-employed within a period of one year and is no longer subject to the compulsory occupational pension plan; • if the accountholder's entire vested assets is smaller than the annual contribution to the previous pension fund prior to the transfer of the vested benefits to the pension fund; and • for the purpose of acquiring or constructing a residential property for his or her own use, or for the purpose of making mortgage repayments for such a residence. You intend to transfer your entire funds in the pension fund to an overseas bank account in either the 2015-16 or the 2016-17 income year. After the transfer from the pension fund to the overseas bank account, you intend to transfer the funds from the overseas bank account to Australia.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 295-95(2) | Income Tax Assessment Act 1997 section 305-70 | 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) | 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 | Superannuation Industry (Supervision) Act 1993 section 10 | Superannuation Industry (Supervision) Act 1993 section 19 | Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision: Detailed Reasoning - Questions 1 and 2: Where a lump sum payment from a foreign superannuation fund is received more than six months after a person has become an Australian resident, the applicable fund earnings in relation to that lump sum payment will be assessable under section 305-70 of the Income Tax Assessment Act 1997 ( ITAA 1997 ) . Before determining whether an amount is assessable under section 305-70 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 section 305-70 will not have any application. The Fund satisfies some of the requirements of a foreign superannuation fund as it is established outside of Australia and the central management and control is outside of Australia. However, the fund is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purposes of the individual's retirement. Members can use the benefits for other purposes, such as purchasing a house. The fund is not a bona fide superannuation fund because its sole purpose is not to provide benefits upon death, invalidity or retirement. 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 Fund is not a superannuation fund for the purposes of the ITAA 1997 and the ITAA 1936 as it allows for withdrawals for pre-retirement purposes. Therefore the Fund is 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 your case, the pension fund does not just provide benefits for the specific future purpose of retirement, invalidity or death; therefore the pension fund cannot be considered a 'foreign superannuation fund' for Australian income tax purposes. 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 - Question 3: Entitlement to Foreign Income Tax offset Subsection 770-10(1) of the ITAA 1997 provides that a Foreign Income Tax Offset (FITO) can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for the income year, only a proportionate share of the foreign income tax paid (the share that corresponds to the part that is assessable income) will count towards the tax offset. The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source. However, section 770-140 of the ITAA 1997 will deem you not to have paid foreign income tax to the extent that you or any other associated entity become entitled to a refund of the foreign income tax. When claiming a FITO, you are required to gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income. The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997). The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source. You do not need to calculate the foreign tax offset cap if you elect to use the $1000 'de minimis cap'. If you elect this, you cannot claim more than $1000 of the foreign income tax paid. In your case, if foreign tax is withheld from your gross payment under the law of the foreign country, you are entitled to FITO under section 770-10 of the ITAA 1997 for the tax paid on a proportionate basis for the share of foreign income included in your assessable income. You will need to apportion your foreign tax paid over the assessable and non-assessable component of the lump sum withdrawn on which the foreign tax was imposed. Once you calculate the amount of foreign tax paid in proportion to the foreign income included in your assessable income, you can decide whether you will elect to use either the FITO cap or the 'de minimis cap'. | Detailed Reasoning - Question 4: Any subsequent movement of these funds from your overseas bank account into your bank account in Australia will not result in any further tax consequences at that time. It should be noted however; that any interest these funds accrue in your Australian bank accounts will be taxable and must be included in your tax returns in each relevant year.