Private ruling: Assessability of a foreign lump sum payment
Date of advice: 24 October 2016
Published: February 2017
Ruling period: Year ended 30 June 20XY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the foreign retirement fund a foreign superannuation fund under subsection 295-95(2) of the Income Tax Assessment Act 1997 ? | A1: No | Q2: Is any part of the lump sum payment you received from the foreign retirement fund included in your assessable income? | A2: Yes

Relevant facts and circumstances: Your relative (the Deceased) passed away. The Deceased held interests in an account in a foreign retirement fund. The account allows for access of benefits prior to retirement age, such as early withdrawals and optional loans. You received a lump sum payment as a beneficiary of the fund.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99B | Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 paragraph 99B(2)(a) | 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 subsection 295-95(2) | Income Tax Assessment Act 1997 subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 section 10 | Superannuation Industry (Supervision) Act 1993 section 19 | Superannuation Industry (Supervision) Act 1993 section 62 | Taxation Administration Act 1953 s ubsection sch 1-357-105(2)

Reasons for decision: Detailed Reasoning - Foreign superannuation fund: A foreign superannuation fund is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (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. Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is: (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 - Provident, benefit, superannuation or retirement fund: The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (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 Commissioner of Taxation (Cth) (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 judgement 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 SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the following events occur: a) on or after retirement from gainful employment; or b) attaining a prescribed age; and c) on the member's death. (This may require the benefits being passed on to a member's dependants or legal representative). Though section 62 of the SIS Act also allows a superannuation fund to provide benefits for 'ancillary purposes', such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses etcetera. Notwithstanding the SIS Act applies only to 'regulated superannuation funds', as defined in section 19 of the SIS Act, and foreign superannuation funds do not qualify as regulated superannuation funds, as they are established and operate outside Australia, the Commissioner views the SIS Act (and its regulations) 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 SIS Act. Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund: a) can also be used as a savings plan for non-retirement purposes; and/or b) contains provisions for pre-retirement withdrawals for general non-retirement purposes such as housing, education and medical expenses. It is noted that the foreign retirement fund you received a payment from satisfies some of the requirements of a foreign superannuation fund as it is established and operated outside 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 withdraw benefits prior to retirement and may undertake optional loans. In other words, the fund provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes. Accordingly, the retirement fund does not fall within the definition of a foreign superannuation fund. | Detailed Reasoning - Ordinary income: Section 6-5 of the Income Tax Assessment Act 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: ● are earned ● are expected ● are relied upon, and ● have an element of periodicity, recurrence or regularity. In your case, the lump sum payment you received from the retirement fund did not have the required elements of periodicity, recurrence or regularity to be considered ordinary income. Therefore, the payment you received is not assessable as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Foreign trust income: Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income. 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 in Australia. In your case, you received a lump sum payment as a beneficiary of a foreign retirement fund. A fund in the nature of a retirement fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder. Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary. However, subsection 99B(1) of the ITAA 1936 is qualified by subsection 99B(2) of the ITAA 1936 which reduces the amount included in the assessable income of the beneficiary to the extent that the amount meets certain criteria. Specifically, paragraph 99B(2)(a) of the ITAA 1936 provides that assessable income will not include the corpus (capital) of the trust - but not an amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer. In your case, the conditions in subsection 99B(1) of the ITAA 1936 are satisfied as you received an amount of trust property during an income year in which you were a resident. However, the receipt of an amount that represents amounts previously deposited to the retirement fund by or on behalf of the Deceased, would come within paragraph 99B(2)(a) of the ITAA 1936; that is, the amount would be considered to represent the corpus of the trust. Distributions, to the extent that they come within subsection 99B(2) of the ITAA 1936, are excluded from amounts assessable under subsection 99B(1) of the ITAA 1936. Only the income accumulated in the retirement fund paid to you as a resident taxpayer that is normally taxable in Australia and had not previously been subject to tax in Australia will be included in your assessable income. Therefore, it is the gross amount you received converted to Australian dollars, less the amount that represents deposits to the fund converted to Australian dollars, that is the amount assessable under subsection 99B(1) of the ITAA 1936.