Private ruling: Assessability of foreign retirement savings plan income
Published: November 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Question and answer | Is the amount withdrawn from your foreign retirement savings plan that does not represent a return of your contributions, assessable? | Yes.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You contributed to a retirement savings plan (the fund) while you were living and working in country X. You contributed to the fund from your salary on a monthly basis and no other contributions were made from any other source or person. You ceased contributing to the fund when you left country X and no other contributions were made after that time. The fund allowed you to invest in different options within the fund and the balance of the fund went up and down over time with market fluctuations. The fund allowed you to withdraw funds at any time for any purpose, whether for retirement purposes or not. You withdrew the entire balance of your fund and the proceeds were credited to a country X bank account you operated. Country X non-resident withholding tax was deducted from the amount that was paid to you.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5 | Income Tax Assessment Act 1997 Subsection 6-10 | Income Tax Assessment Act 1997 Subsection 305-70 | Income Tax Assessment Act 1936 Section 99B | Income Tax Assessment Act 1936 Subsection 99B(1) | Income Tax Assessment Act 1936 Subsection 99B(2) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Detailed Reasoning - Ordinary income: The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia. Ordinary income is income according to ordinary concepts (section 6-5 of the Income Tax Assessment Act (ITAA 1997)). 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 include receipts that are earned, are expected, are relied upon and have an element of periodicity, recurrence or regularity. The lump sum payment you received from the fund was not income from rendering personal services, income from property or income from carrying on a business. The payment was also a one off payment and thus it did not have an element of recurrence or regularity. Therefore, the payment you received is not assessable as ordinary income. | Detailed Reasoning - Statutory income: Statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law (section 6-10 of the ITAA 1997). | Detailed Reasoning - Lump sum payment from a foreign superannuation fund: Section 305-70 of the ITAA 1997 provides that 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 as income. However, the remainder of the lump sum payment will not be assessable. Before determining whether an amount is assessable, 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. Section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) specifies that a superannuation fund is a fund that is an indefinitely continuing fund and is a provident, benefit, superannuation or retirement fund or a public sector superannuation scheme. A foreign superannuation fund is a fund that is established outside of Australia and has its central management and control outside of Australia. Section 62 of the SIS Act specifies that a 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, or · on the members death. In view of the legislation and case law, it is the Commissioner's view 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 retirement or 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: · can also be used as a savings plan for non-retirement purposes, and/or · contains provisions for pre-retirement withdrawals for general non-retirement purposes such as housing or medical expenses. In your case, you withdrew funds from a foreign fund which allowed withdrawals to be made at any time for any purpose. As such, it is evident that the fund provided for the payment of benefits for non-retirement purposes. Accordingly, the Commissioner considers that the fund was not a foreign superannuation fund as the fund was not maintained solely for retirement purposes. Therefore, section 305-70 of the ITAA 1997 does not apply to the lump sum payment you received from the fund. | Detailed Reasoning - Distribution from a foreign trust: A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. Trusts are widely used for investment and business purposes. The tax treatment of a trust and its beneficiaries depends on the nature of the beneficiaries' entitlements under the trust deed. Some entities (including superannuation funds and corporate unit trusts), although classed as trusts, have special taxation arrangements. In your case, you contributed funds to the fund and the provider of the fund invested the funds on your behalf. The fund provider effectively held your funds in trust for you until such time that you requested some or all of your funds to be transferred to you. Therefore, the fund you held is considered to be a foreign trust for Australian tax purposes. 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, that 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: · corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer (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), or · amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936). In your case, you withdrew all your funds from the fund and the amount you received comprised of the return of your original contributions plus interest or earnings derived by the fund. As you made a withdrawal from a foreign trust, the amount withdrawn from the fund was similar to a distribution from a trust and would normally be assessable under subsection 99B(1) of the ITAA 1936. However, a withdrawal of an amount that represents amounts contributed by you falls within paragraph 99B(2)(a) of the ITAA 1936, as the amount represents a distribution from the corpus of the trust; that is, a distribution of a principal or capital sum, as opposed to interest or income. Therefore, the amount you received from the fund that represents the amounts contributed by you falls within subsection 99B(2) of the ITAA 1936 and is excluded from your assessable income. Only the amount you received from the fund that represents the income accumulated in the fund will be assessable and taxable in Australia.