Private ruling: Lump sum payment from a foreign pension fund
Published: October 2014
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is any part of a lump payment received from a foreign pension fund assessable as applicable fund earnings as worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is any part of the lump sum payment received from a foreign pension fund included in your assessable income? | A2: Yes

Relevant facts and circumstances: The taxpayer (the Taxpayer) migrated to Australia some time ago as a Permanent Resident. The Taxpayer held an interest in an overseas pension scheme (the Overseas Fund). There have been contributions to the Overseas Fund since the Taxpayer became a resident of Australia. Information available indicates that part of the benefits in the Overseas Fund can be accessed at any time (provided certain withdrawal conditions are met). Benefits in the Overseas Fund can be used for purposes such as: • To purchase the participants home. • To pay for the higher educational expenses of the participant or their children. • To pay medical costs for the treatment of critical illnesses faced by the participant or their close family members. • To allow withdrawal after age 50 years to prepare and plan for retirement. • To allow members with savings over 1 million and above to withdraw their excess savings and to individually mange or invest. During the 2013-14 income year, the Taxpayer's benefits in the Overseas Fund were transferred to the Taxpayer's Australian bank account. The Taxpayer no longer has any interests in the Overseas Fund.

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 Subdivision 305-B | Income Tax Assessment Act 1997 Section 305--55 | Income Tax Assessment Act 1997 Section 305-60 | Income Tax Assessment Act 1997 Section 305-65 | Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Section 305-75 | 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 the Overseas Fund is not considered to be a payment from a 'foreign superannuation fund' therefore, Subdivision 305-B of the ITAA 1997 has no application in this case. A withdrawal of an amount that represents amounts deposited by the Taxpayer and their employer 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 Overseas Fund (paid to the Taxpayer as a resident taxpayer) that is normally taxable in Australia and had not previously subjected to tax in Australia would be assessable to the Taxpayer under subsection 99B(1) of the ITAA 1936. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds. Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death. Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax-free. It is not assessable income and is not exempt income (sections 305-60 and 305-65 of the ITAA 1997). Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 applies to include any applicable fund earnings in assessable income. Before determining whether an amount is exempt under sections 305-60, or 305-65 of the ITAA 1997, or assessable under section 305-70, 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 subdivision 305-B will not apply. | 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. 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. | Detailed Reasoning - Meaning of 'superannuation fund': 'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA). Subsection 10(1) of the SISA provides that: 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. | Detailed Reasoning - Meaning of 'provident, benefit, superannuation or retirement fund': 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. 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' such as the example given by Justice Kitto of a funeral benefit. Furthermore, Justice Kitto's judgment 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 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. Information available indicates that part of the benefits in the Overseas Fund can be accessed at any time (provided certain withdrawal conditions are met). Benefits in the Overseas Fund can be used for purposes such as: • To purchase the participants home. • To pay for the higher educational expenses of the participant or their children. • To pay medical costs for the treatment of critical illnesses faced by the participant or their close family members. • To allow withdrawal after age 50 years to prepare and plan for retirement. • To allow members with savings over 1 million and above to withdraw their excess savings and to individually mange or invest. As the benefits in the Overseas Fund can be accessed for pre-retirement purposes, the Overseas Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes. Therefore, on the basis of the information provided, the Commissioner considers that a lump sum payment from the Overseas Fund is not received from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997. Consequently, Subdivision 305-B of the ITAA 1997 does not apply to the lump sum payment the Taxpayer received from the Overseas Fund. | Detailed Reasoning - Tax consequences of proceeds from a foreign trust: Before we can consider the tax consequences of proceeds from the Overseas Fund, we must first consider whether it is considered a foreign trust or a foreign superannuation fund. It has been determined that the fund is not a superannuation fund for the purposes of the ITAA 1997 and the ITAA 1936. | Detailed Reasoning - Repeal of FIF measures: In mid-July 20XX, 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 ITAA 1936). 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 the Taxpayer's circumstances: In this case, the Taxpayer has redeemed their interest in the Overseas Fund as a lump sum payment. A withdrawal of an amount that represents amounts deposited by the Taxpayer and their employer 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 Overseas Fund (paid to the Taxpayer as a resident taxpayer) that is normally taxable in Australia and had not previously subjected to tax in Australia would be assessable to the Taxpayer under subsection 99B(1) of the ITAA 1936.