Private ruling: Assessable income
Published: January 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the amount transferred to you from Fund A, an overseas pension scheme, a lump sum payment from a foreign superannuation fund? | A1: Yes. | Q2: Is the amount transferred to you from Fund B, an overseas pension scheme, a lump sum payment from a foreign superannuation fund? | A2: Yes. | Q3: Is the amount transferred to you from Fund C, an overseas pension scheme, a lump sum payment from a foreign superannuation fund? | A3: No. | Q4: Is the amount transferred to you from Fund D, an overseas pension scheme, a lump sum payment from a foreign superannuation fund? | A4: No. | Q5: Is any part of the amount transferred to you from Fund A assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A5: Yes. | Q6: Is any part of the amount transferred to you from Fund B assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A6: Yes. | Q7: Is any part of the amount transferred to you from Fund C assessable to you as a distribution from a foreign trust? | A7: Yes, refer to reasons for decision. | Q8: Is any part of the amount transferred to you from Fund D assessable to you as a distribution from a foreign trust? | A8: Yes, refer to reasons for decision.

Relevant facts and circumstances: You arrived in Australia and have been an Australian resident for tax purposes since that date. You held interests in several overseas pension schemes. The benefits in Fund A and Fund B are only payable upon reaching retirement age. Fund C and Fund D both permit you to make one lump sum withdrawal (full or partial) before you reach retirement age, with the remainder of the benefits being payable upon retirement. You made several additional contributions into Fund A since you migrated to Australia. You made several additional contributions into Fund B since you migrated to Australia. There have been no contributions or transfers to either Fund C or Fund D since you migrated to Australia. You have received a lump sum payment from each fund. You no longer have an interest in any of the four pension schemes.

Relevant legislative provisions: 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 | Income Tax Assessment Act 1997 subsection 295-95(2) | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75 | Income Tax Assessment Act 1997 subsection 305-75(2) | Income Tax Assessment Act 1997 subsection 305-75(3) | Income Tax Assessment Act 1997 paragraph 305-75(3)(a) | Income Tax Assessment Act 1997 subparagraph 305-75(3)(a)(i) | Income Tax Assessment Act 1997 subparagraph 305-75(3)(a)(ii) | Income Tax Assessment Act 1997 subparagraph 305-75(3)(a)(iii) | 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 subsection 305-80(1) | Income Tax Assessment Act 1997 subsection 305-80(2) | Income Tax Assessment Act 1997 subsection 960-50(1) | Income Tax Assessment Act 1997 subsection 960-50(4) | Income Tax Assessment Act 1997 subsection 960-50(6) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Regulations 1997 regulation 960.50.01 | Superannuation Industry (Supervision) Act 1993 section 10 | 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: Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received more than six months after a person has become an Australian resident, will be assessable under section 305-70 of the ITAA 1997. The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income. The applicable fund earnings amount is worked out under either subsection 305-75(2) or 305-75(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 was not an Australian resident at all times during the period to which the lump sum relates. An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund. | 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. Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997, 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': Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA). In accordance with subsection 10(1) of the SISA, 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. 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. Meaning of 'provident, benefit, superannuation or retirement fund' 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'. 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 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 that 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. It is evident that all four pension schemes were established outside of Australia and have their central management and control outside of Australia. In addition, the information provided indicates that your benefits in Fund A and Fund B are only payable upon retirement. Therefore, the Commissioner considers that both Fund A and Fund B are a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. However, the information provided in relation to Fund C and Fund D indicates that you may make one partial (or full) cash withdrawal at any time before you retire. This means that there exist provisions for the payment of your benefits 'for any other reason whatsoever.' Following on from Justice Kitto's judgement in Mahony , neither Fund C nor Fund D is an exclusively provident, benefit or superannuation fund. Therefore, the Commissioner does not consider either Fund C or Fund D to be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings - Fund A and Fund B: You became a resident of Australia for tax purposes on dd/mm/yyyy (the Residency Date) and received a lump sum payment in respect of your entitlements in Fund A on dd/mm/yyyy. In addition, you received a second lump sum payment in respect of your entitlements in Fund B on dd/mm/yyyy. Since both of these payments occurred more than six months after you became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) of each lump sum payment in your assessable income for the relevant year. The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. As mentioned above, subsection 305-75(3) of the ITAA 1997 applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 states: If you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows: (a) work out the total of the following amounts: (i) The amount in the fund that was vested in you just before the day (the start day ) you first became an Australian resident during the period; (ii) the part of the payment that is attributable to contributions to the fund made by or in respect of you during the remainder of the period; (iii) the part of the payment (if any) that is attributable to amounts transferred into the fund from any other *foreign superannuation fund during the period; (b) subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for *foreign tax); (c) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; (d) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). The effect of section 305-75 of the ITAA 1997 is that you are assessed only on the income you earned on your benefits in Fund A and Fund B less any contributions made since you became a resident of Australia. Any earnings made during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount. | Detailed Reasoning - Question 7 and 8: As discussed above, Fund B and C are foreign trusts as defined in subsection 481(3) of the ITAA 1936 and are therefore foreign investment funds (FIFs). | Detailed Reasoning - 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. | Detailed Reasoning - 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). | Detailed Reasoning - Application to your circumstances: In this case, you withdrew your interest in Fund C and D as a lump sum payment. 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.