Private ruling: Foreign superannuation fund
Published: December 2014
Ruling period: Income year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the Retirement Fund (the Fund) a 'foreign superannuation fund' within the meaning of that expression in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), including for the purposes of Division 305 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: The Fund was established by a Deed of Trust made between Company A as the Principal Employer and Company B as the trustee of the Fund (the Trustee). Company A is a company incorporated overseas with its registered office overseas. Company B is a company incorporated overseas with its registered office overseas. Meetings of the Trustee's directors are all conducted overseas. Less than 5% of the Fund's portfolio of assets is invested in Australian assets. Only one member of the Fund is an Australian resident. Their ownership interest represents between 1-2% of the Fund's total assets. There are X managers who have been appointed by the Trustee to manage the Fund assets. Y are overseas and one in Australia. The Australian manager manages less than 0.5% of the Fund's total assets. The Trustee wishes to offer fund membership to employees of Australian public companies, their subsidiaries and affiliates working outside Australia (Target Employees). These members will be ordinary members and their retirement benefits will be calculated according to their own individual accumulation account with the Fund. The Target Employees will include Australian residents, former Australian residents who may return to Australia and foreign residents who subsequently become Australian residents. The Fund may also potentially have discretionary class members who will be non-residents working for non-resident companies. The amount of benefit payable to a discretionary class member from assets of the Fund allocated to the discretionary class will be subject to the Trustee's discretion. The Trust Deed of the Fund (the Deed) states, in paragraph C, that: The Fund is established and maintained solely for the purpose of providing superannuation benefits for Members in the event of their Retirement or in certain circumstances, for the Dependants of Members. The Deed provides the following in relation to contributions made to the Fund: (a) Members' Contributions i) ... Contributions payable by a Member may, with the Member's consent, be deducted by the Member's Employer from each wage or salary payment and paid by the employer to the Fund... ii) Discretionary Class Members shall not make... Contributions to the Fund... (b) Employer's Contributions i) ... an Employer will contribute to the Fund in respect of a particular Employee who is a Member of the Fund... ii) An Employer may make Contributions for the purposes of making provision for benefits for Members of the Relevant Discretionary Class. iii) ... Under a specific clause of the Deed no member, beneficiary, or relative of either, has the right to borrow against the security of any of the benefits expected to be received under the Deed. A specific clause of the Deed provides that: i) no Member or Dependant of a Member shall be entitled to receive any Benefit prior to the Member retiring from Gainful Employment otherwise than in the event of Total and Permanent Disablement or death of the Member or in other exceptional circumstances acceptable to the Trustee and in which the Trustee considers it proper, equitable and in pursuance of the objects of the Fund... In accordance with the Deed, the Fund will be wound up if: • the employer is no longer able to make contributions due to being placed in receivership, liquidation or if the employer permanently terminates its contributions to the Fund by notice in writing to the Trustee; or • there are no further members remaining in the Fund; or • the Trustee otherwise determines for any reason that the Fund should be wound up. In accordance with specific clauses of the Deed, ordinary members' lump sums or pensions are payable when the member meets one of the following conditions: • retires from the workforce at or after normal retirement age; • retires from employment with an employer at or after normal retirement age; • reaches the age of 60 years; • becomes totally and permanently disabled; • becomes temporarily totally disabled; or • dies. The Deed states that for discretionary members benefits will be provided as lump sums or pensions when or any time after the member: • retires from gainful employment with the employer at or after normal retirement age; • retires from the workforce; • becomes totally and permanently disabled in the opinion of the Trustee; or • retires from gainful employment with the employer and there is no arrangement in place for the member to be re-employed by the employer or associated entity and further the member is not dismissed or due to be dismissed by the employer. A clause of the Deed confers upon the Trustee the power to vary the Deed. The Deed of Variation states that: • After execution of the Deed the Fund will continue to be the same super fund as when it commenced, continue to be a super fund, have the same members and no new members will be added, have the same assets and no new assets shall be added. • The Trustee is of the opinion and declares that the Deed and the additions, amendments, alterations, modifications, rescissions and variations are for the benefit of the present and any future members of the Fund and their dependents. • These changes will not reduce any benefit calculated on the basis of contributions to the Fund and earnings on those contributions that have accrued and become payable before the changes; or • Reduce the amount of the benefit other than a benefit in the paragraph above that is or may become payable in relation to a period before the date of execution of this Deed.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-95(2) | Income Tax Assessment Act 1997 Subsection 295-95(3) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 19 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: The Retirement Fund is a foreign superannuation fund within the meaning of that expression in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), including for the purposes of Division 305 of the ITAA 1997. | 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. Subsection 295-95(3) of the ITAA 1997 states: A member is covered by this subsection at a time if the member is: (a) a contributor to the fund at that time; or (b) an individual on whose behalf contributions have been made, other than an individual: (i) who is a foreign resident; and (ii) who is not a contributor at that time; and (iii) for whom contributions made to the fund on the individual's behalf after the individual became a foreign resident are only payments in respect of a time when the individual was an Australian resident. Thus, a superannuation fund that is established outside of Australia, and has its central management and control outside of Australia, could qualify as a foreign superannuation fund . The fact that some of its members may be Australian residents would not necessarily alter this. However, before it can be said that such a fund is a foreign superannuation fund, it must first be established that the fund is, in fact, a superannuation fund. If the fund is not a superannuation fund , the fund will not be a foreign superannuation fund for the purposes of the ITAA 1997. | 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), 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; 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. | Detailed Reasoning - 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' 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 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 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 SISA. Thus, based on the above, before it can be said that the Fund is a superannuation fund, it must be established that: • there is a 'fund'; • the Fund is an indefinitely continuing fund; and • it is a provident, benefit, superannuation or retirement fund . | Detailed Reasoning - The 'fund': The term 'fund' is not defined in either the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936). Therefore, it should be given its ordinary meaning, subject to the context in which it appears, and having regard to any relevant case law authorities. The Australian Oxford Dictionary , 2004, Oxford University Press, Melbourne defines the term 'fund' as: 1 a permanent stock of something ready to be drawn upon... 2 a stock of money, especially one set apart for a purpose. In accordance with the Deed, contributions are made to the Fund for/on behalf of the members of the Fund and then invested by the Trustee with the income therefrom being capitalised until such time as benefits are paid to members on meeting certain conditions. Consequently, there is a 'fund' that is set aside and invested for the purpose of paying benefits to the members of the Fund. | Detailed Reasoning - Indefinitely continuing fund: The Deed specifies the circumstances in which the Fund may be wound up, but does not specify a pre-determined date. In addition, the this ruling application states that, although the Trustee has the power to wind up the Fund for any reason, it has not exercised that power and there is no specific date by which it will exercise that power. In Cameron Brae Pty Ltd v. Federal Commissioner of Taxation ; [2007] FCAFC 135; (2007) 2007 ATC 4936; (2007) 67 ATR 178; (2007) 161 FCR 468; (2007) 243 ALR 273 ( Cameron Brae ), the Full Federal Court considered whether a fund, that contained a clause that is similar to clause 43 of the Deed, was a 'superannuation fund' for the purposes of former section 82AAE of ITAA 1936 and concluded that the fund was an 'indefinitely continuing fund'. Therefore, it is accepted that there is the intention and expectation that the Fund will be an indefinitely continuing fund. | Detailed Reasoning - Provident, benefit , superannuation or retirement fund: The Deed states that the Fund is established and maintained solely for the purpose of providing superannuation benefits for Members in the event of their retirement or, in certain circumstances, for the dependants of members. The Fund has two classes of members, that is, ordinary members and discretionary members. The payment of retirement benefits to discretionary class members is subject to the Trustee's discretion. There is no Trustee discretion in the case of ordinary members. The retirement benefits payable to these members are calculated with reference to the balance of their own individual accumulation account with the Fund. Therefore, it is possible that the discretionary members may not receive a benefit from the Fund as the benefits are payable to them at the Trustee's discretion. However, in Cameron Brae it was held that a fund can be a superannuation fund even though it has ordinary and discretionary class members. Justice Jessup, at 106, stated: ... A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a "superannuation fund". That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying. Consequently, the Fund will be a superannuation fund if it meets all the other requirements. In accordance the Deed, in general terms, benefits are payable when a member: • retires from the workforce at or after normal retirement age; • retires from employment with an employer at or after normal retirement age; • reaches the age of 60 years; • terminates employment or is absent from employment because of retirement or total disablement; or • dies. It is clear, from the above, that the benefits are payable upon events common to superannuation funds, that is, on retirement, termination of employment, disability or death. Further, a member cannot borrow against the security of benefit entitlements or receive benefits prior to the above events. Therefore, a member cannot access their benefits for purposes other than those relating to retirement, for example, for education, home loans or medical expenses. Based on the above, it is accepted that the Fund's sole purpose is to provide benefits for members on retirement. Consequently, the Fund is considered to be a superannuation fund. | Detailed Reasoning - Is the Fund a 'foreign superannuation fund'?: As stated above, a foreign superannuation fund is a superannuation fund that is not an Australian superannuation fund. Therefore, the Fund will be a foreign superannuation fund only if the following conditions are not satisfied: • Fund established in Australia or any asset of the fund situated in Australia: • The Fund was incorporated overseas; its registered office is overseas; and less than 5% of the Fund's assets is invested in Australia. Therefore, the Fund is established outside of Australia and this condition is not satisfied. | Detailed Reasoning - Central management and control ordinarily in Australia: The central management and control (CM&C) of the Fund is in the foreign country where Z of its V directors reside. The fifth director resides in a different foreign country. The meetings of the directors are held overseas. Despite the Fund engaging fund managers overseas and in Australia; it does not impact on the location of the CM&C of the Fund as the role of fund managers includes day-to-day management and operational type activities which do not constitute CM&C. Accordingly, the CM&C of the Fund is outside Australia and therefore this condition has not been satisfied. | Detailed Reasoning - Active member test: For a fund to be an Australian superannuation fund, 50% of the total market value of a fund's assets or amounts payable to, or in respect of, members is to be attributable to superannuation interests held by active members who are Australian residents., In accordance with subsection 295-95(3) of the ITAA 1997, members who are foreign residents cannot be active members. The Fund only has one Australian resident member. As this member does not hold 50% of the Fund's assets, this test is not satisfied. As the above conditions have not been satisfied, the Fund is not an Australian superannuation fund. The Fund is therefore, a foreign superannuation fund.