Private ruling: Election to transfer benefits from an overseas fund
Published: October 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Can an election be made under section 305-80 of the Income Tax Assessment Act 1997 (ITAA 1997) for a lump sum payment from an overseas fund to be taxed in an Australian superannuation fund as 'applicable fund earnings'? | A1: No.

Relevant facts and circumstances: Your client resided and worked in an overseas country (the overseas country). Over 20 years ago, your client became an Australian resident for tax purposes. An entity advised that in lieu of your client's pension, a specified amount would be made to your client as a lump sum. In addition, your client's profit sharing account would be paid out. In a settlement statement from the Trustee for a plan, it shows a withdrawal amount for your client for a specified period. The Trustee advised that a specific amount was to be credited to your client's account number. Your client commenced membership with a Plan (the Plan). The Plan is a personal tax-deferred retirement plan. In a statement from the Plan it shows your client's specified benefits were transferred to the Plan in a particular tax year. The Plan is not an employer sponsored fund. The Plan was started with roll-overs from your client's overseas employer's pension fund and other termination payments. A copy of the Plan's Disclosure Statement and an Agreement have been provided which state amongst other matters that your client can withdraw all or any of the assets in the Plan at any time except to the extent that your client restrict their liability to do so by assigning assets in your client's plan as security, and to repay a distribution from the plan restricted under an overseas country regulation. Any amount your client or your client's beneficiaries receive from the plan is called a "distribution". Furthermore, under other rules of the Plan if your client borrowed all or any portion of the assets in the plan the entire value of your client's account would be treated as though it were distributed to your client. If your client pledged all or part of your client's plan as security (collateral) for a loan, the part your client pledged will be considered to have been distributed to your client for the year it is pledged. In either case, your client would then have to report the amount deemed distributed to your client in your client's gross income for the year involved, and a penalty tax on premature distributions would apply if your client was under a specified age and not totally and permanently disabled. You have also provided information that shows your client could make withdrawals from the Plan before a specific age without incurring an additional tax penalty for various purposes which could include: • medical costs • education expenses. • buy, build, or rebuild a first home. In 2014, the plan was sold to another entity and your client was advised: • your client may transfer your client's assets to another suitable financial institution that is qualified to service a specific plan; or • your client can elect to liquidate all the assets held in your client's account(s) and have the proceeds distributed directly to your client. No contributions have been made by your client or anyone on behalf of your client to the Plan since your client became a resident of Australia. No additional amounts were transferred from any source after the Plan was opened and no active investment of the account was taken after the initial investment selection. Your client is under the specified age to be excluded from the additional tax penalty.

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 305-75(2). | Income Tax Assessment Act 1997 subsection 305-75(3). | Income Tax Assessment Act 1997 section 305-80. | Income Tax Assessment Act 1997 subsection 305-80(1). | Income Tax Assessment Act 1997 subsection 995-1(1). | 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: Summary: The lump sum payment from a Plan (the Plan) in the overseas country is not assessable in Australia as 'applicable fund earnings' because the Plan is not a superannuation fund. Therefore your client cannot utilise the election to have part or all of the payment treated as assessable income of an Australian superannuation fund. | Detailed Reasoning - Detailed reasoning: The Plan is a trust or custodial account set up in the overseas country for the exclusive benefit of your client or your client's beneficiaries. The account is created by a written document. Your client can withdraw or use the Plan assets at any time. Early distributions of taxable amounts from the Plan must be included in your client's gross income. However, a specified percentage additional tax applies if your client withdraws or uses the Plan assets before your client reached a specified age. It is in addition to any regular income tax on that amount. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: The applicable fund earnings in relation to a lump sum payment (LSP) from a foreign superannuation fund that is transferred or received more than six months after a person has become an Australian resident will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The applicable fund earnings are subject to tax at the person's marginal rate. The remainder of the LSP is not assessable income and is not exempt income. The applicable fund earnings is the amount worked out under either subsection 305-75 (2) or subsection 305-75(3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 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. 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. | Detailed Reasoning - 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 an 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 same 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: • on or after retirement from gainful employment; or • on 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 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 the SIS 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, in order for the lump sum payment from the Plan to be considered payments from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2). This means that the paying fund must be a provident, benefit, superannuation or retirement fund established and administered overseas. In this case, the early withdrawals feature of the Plan does not satisfy the sole purpose test. Withdrawals can be made at any time for any reason. The Plan is not established solely to pay benefits on retirement (or invalidity or death). In order for a fund to be considered a superannuation fund, it is important that the fund be maintained primarily for retirement purpose and the sole purpose test provides a guide of what are acceptable purposes. Due to certain characteristics of the Plan, in particular the ability to make early withdrawals for specified purposes with no penalty and withdrawals for non-specified purposes at any time with only a small penalty tax, the Plan does not meet the conditions required to be considered to be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. In other words the Plan provides for the payment of benefits for other reasons and not solely (that is, exclusively) for retirement purposes. In view of the above, your client's Plan cannot be viewed as a superannuation fund for the purposes of either the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997 as the Plan is not solely for the provision of retirement benefits. Accordingly, the Plan does not satisfy the definition of a superannuation fund and so the withdrawals made from your client's Plan are not assessable as 'applicable fund earnings' under section 305-70 of the ITAA 1997. | Detailed Reasoning - Election: A taxpayer transferring a lumps sum payment from a foreign superannuation fund directly to an Australian complying superannuation fund more than six months after becoming a resident, can elect under subsection 305-80(1) of the ITAA 1997 to have all or part of the payment otherwise assessable under section 305-70 of the ITAA 1997 (the applicable fund earnings) treated as assessable income of the Australian superannuation fund. As the payment made from the Plan is not a superannuation fund, your client cannot utilise the election under subsection 305-80(2) of the ITAA 1997 to have all or part of the payment treated as assessable income of an Australian superannuation fund.