Private ruling: Taxation of a foreign lump sum payment
Date of advice: 23 January 2024
Published: 4 March 2024
Ruling period: Year ended 30 June 20YY.
Date scheme commenced: 1 July 2020

Ruling: Q1: Is the foreign plan (the Plan) a foreign superannuation fund as defined in section 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is any part of a lump sum payment to you from the Plan made from a scheme for the payment of benefits in the nature of superannuation upon retirement or death that satisfies the conditions set out in subsection 305-55(2) of the ITAA 1997? | A2: No | Q3: Is any part of a lump sum payment to you from the Plan applicable fund earnings under section 305-75 of the ITAA 1997? | A3: No. | Q4: Is any part of a lump sum payment to you from the Plan assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A4: Yes.

Relevant facts and circumstances: You held an interest in a foreign plan (the Plan). Your date of birth is XX/XX/19XX. The Plan is approved superannuation scheme established and managed outside Australia. Based on information taken from the Plan's web site, contributions made to the Plan are saved across three accounts; • Ordinary Account - that can be used for retirement housing, insurance and investments • MediSave Account - that can be used to pay for hospitalisation expenses and approved medical insurance; and • Special account - that can be used for old age and investment in retirement related financial products The fourth account - a Retirement Account is only created where an individual turns 55 years of age. You joined the Plan prior your migration to Australia in 20XX. On XX/XX/20XX you were notified via email that in XX/20XX the Plan's Board announced that the Plan's account belonging to foreigners will be closed and that for this reason you are required to close your Plan's account and transfer your savings to your bank account. Your Plan's balance prior it's closure on XX/XX20XX comprised of the following accounts: • Ordinary Account - foreign currency $XX,XXX.XX • MediSave Account - foreign currency $XX,XXX.XX • Special account - foreign currency $XX,XXX.XX On XX/XX/20XX the Plan deposited the payment to your Australian bank account. At the time of the payment, you were XX years of age.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99B | Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 subsection 99B(2) | Income Tax Assessment Act 1936 subsection 99B(2)(a) | Income Tax Assessment Act 1997 subsection 6-5(2) | 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 subsection 305-55(2) | 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 subsection 10(1) | Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision: Detailed Reasoning - Summary:: The Plan is not a foreign superannuation fund as defined in section 995-1(1) of the ITAA 1997 . Any lump sum payment to you from the Plan is not from a scheme for the payment of benefits 'in the nature of superannuation upon retirement or death' for the purposes of subsection 355-55(2) of the ITAA 1997. No part of any lump sum payment to you from the Plan will be applicable fund earnings under section 305-75 of the ITAA 1997. A part of a lump sum payment to you from the Plan will be assessable under section 99B of the ITAA 1936. | 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. 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. 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 states: 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': Whether the Plan is a foreign superannuation fund requires consideration of the meaning of the term 'provident, benefit, superannuation or retirement fund' in subsection 10(1) of the SISA. Each of these terms are not defined in the ITAA 1936, ITAA 1997, the SISA or elsewhere in the tax acts. Accordingly, those terms will derive their meaning from their ordinary meaning and the relevant case law. In the context of considering the term 'provident, benefit or superannuation fund established for the benefit of employees', in former subparagraph 23(j)(i) of the ITAA 1936, the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 ( Mahony ) considered that this phrase denoted 'a purpose narrower than the conferral of benefits in a completely general sense' and had to be characterised by 'some specific future purpose'. In the case of a provident fund, against 'contemplated contingencies; in the case of a superannuation fund 'on retirement, death or cessation of employment'; and, in the case of a benefit fund 'a benefit characterised by some specific future purpose' (e.g. a funeral fund). Furthermore, Justice Kitto's judgement in Mahony indicated that a fund does not satisfy any of the three provisions, that is, either a 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. A similar approach was also adopted by Taylor J and Windeyer JJ in Mahony who said: > > ...In other words, if they could, keeping within the terms of the trust, apply the fund or any portion thereof to purposes foreign to the true purposes of such a fund, then it would not be such a fund. > > Accordingly, the purpose of the fund must be solely consistent with it being a 'provident, benefit or superannuation fund'. [1] Similar observations have been made in a number of other authorities. [2] In the context of what constitutes a 'superannuation fund' and a 'fund', Justice Windeyer in Scott v. Federal Commissioner of Taxation (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333emphasised the 'sole purpose' requirement, stating: ...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. > > More recently, in considering the term 'provident, benefit, superannuation or retirement fund' as it now appears in the definition of 'superannuation fund' in subsection 10(1) of the SISA, Senior Member FD O'Loughlin in Baker v. FC of T [2015] AATA 469 (Baker) stated at [16]: Accordingly, a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund. Whilst the Senior Member in Baker made reference to 'benefits not permitted by the Supervision Act' in the context of considering whether a particular fund which was not a 'provident, benefit or retirement fund' was a 'superannuation fund', it is noted that section 62 of the SISA largely replicates the relevant case law and requires the fund be 'maintained solely' for one or more of the 'core purposes' of providing benefits to a member when the events occur: • on or after retirement from gainful employment; • attaining a prescribed age; or • on the member's death (this may require the benefits being passed on to a member's dependants or legal representative). Whether a fund has been established for the requisite purpose required, is determined by considering the terms of the trust deed. This is an objective determination, and it is not determined by the subjective intentions of the parties. [3] Whether a particular arrangement constitutes a superannuation fund is dependent upon the facts and circumstances of the case. Regard is had to the terms of the constituent arrangements and what the relevant trustee can and cannot do, and is and is not obliged to do, with the trust assets and property. [4] As Taylor and Windeyer JJ observed in Mahony : It thus becomes necessary to look carefully and critically at the terms of the trust deed, at what is required and what is permitted - that is to say in what ways the trustees might, without any breach of the trusts it imposes, apply the trust property. > > In the present case, the Plan comprises of various social security saving accounts that can be utilised to pay for retirement housing, insurances, investments and hospitalisation expenses. Retirement account is only created within the Plan when the member turns 55 years of age. You were under 55 years of age at the time of the foreign lump sum payment was paid to you due to the Plan's announcement that accounts belonging to foreigners will be closed. The Plan's statement that was issued to you on XX/XX/20XX, prior to its closure, supports that the money held within the Plan were not held in a Retirement Account. So, whilst the Plan provides its members with some benefits which are consistent with it being a superannuation fund for the purposes of the definition in subsection 10(1) of the SISA that is not the Plan's sole purpose. The Plan also provides benefits that are inconsistent with it being a 'provident, benefit, superannuation or retirement fund'. Accordingly, in circumstances where the Plan permits the withdrawal of benefits for purposes not solely consistent with the fund being a 'superannuation fund', the Plan cannot be a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Payment 'in the nature of superannuation upon retirement or death': Where the Plan is not a superannuation fund, consideration must be given as to whether the payment is made from a scheme for the payment of benefits 'in the nature of superannuation upon retirement or death' as contemplated by subsection 305-55(2) of the ITAA 1997. Subsection 305-55(3) of the ITAA 1997 ensures that payments from foreign superannuation schemes under subsection 305-55(2) are taxed in the same way as if they were paid from a 'foreign superannuation fund'. It is intended to apply to payments that, though not from a superannuation fund, are nevertheless payments made from a scheme that has the same characteristics as superannuation. Subsection 305-55(2) of the ITAA 1997 does not define the concept of payment of benefits 'in the nature of superannuation'. The ordinary meaning of 'in the nature of' is something similar to, typical of, or in the manner of' superannuation. Therefore, payments which closely align with the purpose of superannuation will amount to payments in the 'nature of superannuation'. In Baker , Senior Member FD O'Loughlin stated at [19]: ... for a payment to be a payment from a scheme for the payment of benefits in the nature of superannuation upon retirement the scheme would need to provide for payments that have the essential qualities, character or features of payments of superannuation benefits on retirement. Further, the scheme would need to be such that such payments were more than just possibilities among a range of alternatives such as simple withdrawals available at any time. Baker was decided on the basis money could be withdrawn from an Individual Retirement Account (IRA) at any time prior to any retirement event at the complete discretion of the IRA account holder. Due to the flexibility of monetary withdrawals, 'in the nature of superannuation' payments from the IRA were but one of a number of possibilities. Accordingly, this meant that the scheme was not one for the payment of benefits 'in the nature of superannuation upon retirement or death' within the meaning of section 305-55(2) of the ITAA 1997. Similarly, in the present context, whilst moneys could be withdrawn from the Plan for purposes that do come within the nature of superannuation upon retirement or death, this was one of a range of possibilities for which that benefits could be withdrawn. Those other possibilities having no direct connection with a benefit provided 'in the nature of superannuation upon retirement or death'. Therefore, it cannot be considered that moneys paid from the Plan are paid from a scheme this is solely for the payment of benefits 'in the nature of superannuation upon retirement or death' as contemplated by subsection 305-55(2) of the ITAA 1997. | Detailed Reasoning - Taxation of funds as applicable fund earnings: As the Plan is not a 'foreign superannuation fund' and nor is the payment paid from a scheme for the payment of benefits 'in the nature of superannuation upon retirement or death', section 305-70 of the ITAA 1997 does not apply to any lump sum received by the you from the Plan. Accordingly, no part of any such lump sum is applicable fund earnings for the purposes of section 305-75 of the ITAA 1997. | Detailed Reasoning - Foreign trust income: A distribution from the Plan may also be subject to assessment under section 99B of the ITAA 1936. Broadly, section 99B of the ITAA 1936 deals with the receipt of trust amounts that have not previously been subject to tax in Australia. It applies where an Australian resident for tax purposes receives a lump sum payment from a foreign trust. Subsection 99B(1) of the ITAA 1936 provides that where a beneficiary who was an Australian resident at any time during an income year is paid an amount 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 in the income year it is paid. However, subsection 99B(2) of the ITAA 1936 reduces the amount to be included in assessable income under subsection 99B(1) by so much of that amount, relevantly for present purposes, as represents the corpus of the trust, but not 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. The term 'corpus' is not defined in the legislation; therefore, it takes the ordinary meaning of the term. The Macquarie Dictionary (Online edition 2019) defines 'corpus' to mean a 'principal or capital sum, as opposed to interest or income'. The amount that represents the corpus of the Plan includes any amounts previously deposited into the Plan by you and your employer. The lump sum may also include amounts that represent earnings of the Plan. Plan earnings are not taken to represent corpus, as the earnings are attributable to income derived by the Plan which would have been subject to tax had the earnings been derived by a resident taxpayer. Therefore, paragraph 99B(2)(a) of the ITAA 1936 applies to you so that: a) the proportion of any lump sum that represents amounts previously deposited to the Plan by you and your employer is excluded from your assessable income, and b) the proportion of any lump sum that represents earnings of the Plan (from the commencement date of the Plan) is included in your assessable income. [1] See further the discussion of Member McCaffrey in Case R49 16 TBRD 219 at 221-222 as to whether an employee benefit fund was a 'provident, benefit or superannuation fund'. [2] Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468; Compton v Federal Commissioner of Taxation (1966) 116 CLR 233; W alstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1. [3] Brynes v. Kendle [2011] HCA 26 at [115]. [4] Baker at [12]; see also Raymor Contractors Pty Ltd v. Federal Commissioner of Taxation (1991) 91 ATC 4259.