Private ruling: Lump sum payment
Date of advice: 7 September 2022
Published: November 2022
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Fund a 'foreign superannuation fund' as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. This private ruling applies for the following period: Income year ending 30 June 20XX The scheme commenced on: 1 July 20XX

Relevant facts and circumstances: The Taxpayer held an interest in a Fund. The Fund is a retirement fund established and managed outside of Australia. The Information Document of the Fund states the following: Withdrawing from your investment before retirement You are only allowed to withdraw once from this investment before you retire from the Fund, and you may select a partial or full withdrawal. If you transfer to us from another Preservation Fund, and you have already taken a withdrawal from the previously preserved money, the previous withdrawal will count as your one withdrawal, and you will not be able to withdraw from the investment again until you retire. If you leave your employer fund and preserve your savings when you are over the normal retirement age of the employer fund, you will not be permitted to make a withdrawal from your Preservation Fund investment before you retire. The Taxpayer became a resident of Australia for taxation purposes. The Taxpayer withdrew a lump sum amount from the Fund. The Taxpayer no longer has an interest in the Fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-10 | 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 subsection 995-1(1) | Income Tax Assessment Act 1936 section 99(B) | 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 Fund is not a foreign superannuation fund as per subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Lump sum payments received from certain foreign superannuation funds: Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation lump sum benefits paid from foreign superannuation funds and other foreign schemes for the payment of similar retirement or death benefits, as defined in section 305-55 of the ITAA 1997. Before determining whether an amount is assessable income under subdivision 305-B of the ITAA 1997, it is necessary to determine whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund (or scheme for the payment of superannuation benefits), Subdivision 305-B will not apply to the payment. | 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 that income year. Subsection 295-95(2) of the ITAA 1997 provides that an Australian superannuation fund is: 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 active members 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. The three tests under subsection 295-95(2) of the ITAA 1997 must be satisfied at the same time. If a fund fails to satisfy one of the above tests at a particular time, it is not an Australian superannuation fund at that time. A superannuation fund that is established, managed or controlled outside of Australia or has all of its assets 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. Section 305-55 of the ITAA 1997 also provides for a lump sum benefit payment (that is not a pension payment) made from a foreign retirement scheme (that provides retirement benefits 'in the nature of superannuation') to receive the same tax treatment as a superannuation lump sum paid from a foreign superannuation fund. However, the conditions in Subsection 305-55(2) of the ITAA 1997 must be met, including: a) the scheme was not established in Australia; and b) the scheme is not centrally managed or controlled in Australia. | 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 defines a superannuation fund as: 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, 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 stated 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'. Justice Kitto's judgment indicated that a fund is not a 'provident, benefit or superannuation fund' if there are provisions for paying benefits 'for any other reason whatsoever.' Although a fund may contain provisions for retirement purposes, it cannot be accepted as a superannuation fund if it contains provisions for benefits to be paid in circumstances other than the member's retirement. In the case of Baker v FC of T 2015 ATC 10-399; (2015) AATA 469 (Baker), Senior Member O'Loughlin stated that: ...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 ... Accordingly, 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. In paragraph 62(1)(a) of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member only when one of the following events occurs: a) on or after retirement from gainful employment b) attaining a prescribed retirement age c) the member dies (which may require the benefits to be passed on to the member's dependants or legal representative). The SISA and the Superannuation Industry (Supervision) Regulations 1994 (SISR) provide guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. This guidance is still relevant to understanding the purpose of foreign superannuation funds, even though the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA) that are established in Australia and operate in Australia. In view of the legislation and decisions made in the Scott and Baker cases, a fund can only be classified as a superannuation fund if it exclusively provides benefits for the purpose of payment upon the member's retirement, invalidity or death, or as otherwise specified under the SISA and SISR. A foreign retirement fund is not a superannuation fund for Australian income tax purposes if the fund allows for withdrawals for pre-retirement purposes, such as education. In this case, the Information Document of the Fund states that you can make 'one partial or full withdrawal from your investment before retirement' for non-specified purposes. As the benefits in the Fund are not paid only for retirement purposes, the fund does not meet the 'sole purpose test' and therefore is not a 'superannuation fund' for Australian income tax purposes. Therefore, the lump sum payment from the Fund is not 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 payment that you received from the Fund. | Detailed Reasoning - Assessable income from a payment by a foreign entity that is not a superannuation fund: The assessable income of an Australian resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year, as per subsections 6-5(2) and 6-10(4) of the ITAA 1997. The lump sum withdrawn from a foreign fund would not be ordinary income under subsection 6-5(2) of the ITAA 1997. However, the lump sum is statutory income, which is included in assessable income by a specific provision in the Australian tax legislation. Section 10-5 of the ITAA 1997 lists the provisions for statutory income, including section 99B of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with income received from a trust, where the trust income has not previously been subject to tax. Subsection 99B(1) of the ITAA 1936 provides that where, during an income year, a beneficiary who was an Australian 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 to exclude any amount that is either: a) the corpus of the trust estate; b) amounts that would not have been included in the assessable income of an Australian resident taxpayer; c) amounts included in the beneficiary's income under section 97 of the ITAA 1936; d) amounts included in the assessable income of any taxpayer (other than a company) under section 102AAZD of the ITAA 1936; or e) if the beneficiary is a company, amounts included in the assessable income of the beneficiary under section 102AAZD of the ITAA 1936. When considering whether an amount represents the corpus of the trust estate, paragraph 99B(2)(a) of the ITAA 1936 requires us to consider whether the amount derived by a trust estate would have been assessable if it was derived by an Australian resident taxpayer. For example, an amount provided to a beneficiary of a trust from the trust's capital would be assessable as the beneficiary's income, if the trust: a) accumulated income; b) added this income to its corpus; c) subsequently paid the capitalised amount to a beneficiary (or applied the capitalised amount for the beneficiary's benefit). The beneficiary would be required to report the amount they received from the trust's capital in their assessable income, if they did not meet any of the other exclusions provided in subsection 99B(2) of the ITAA 1936. Amounts withdrawn from a foreign retirement fund and paid to a member or beneficiary are similar to trust distributions and are therefore included in the recipient's assessable income under subsection 99B(1) of the ITAA 1936, less the reduction amounts (if applicable) listed under subsection 99B(2) of the ITAA 1936. In this case, if applicable, the part of the lump sum payment not reduced from assessable income under subsection 99B(2) of the ITAA 1936, should be included in your assessable income under subsection 99B(1).