Private ruling: Lump sum payment from foreign retirement savings plan
Published: August 2014
Ruling period: The year ended 30 June 2014.
Date scheme commenced: 1 July 2013

Ruling: Q1: Does any portion of the proposed lump sum payment from the foreign retirement product represent applicable fund earnings (excluding amounts deposited by you) to be included in your assessable income? | A1: No. | Q2: If the answer to question 1 is no, is any portion of the proposed lump sum payment to be included in your assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 ? | A2: Yes. | Q3: Will you be entitled to claim a credit (in part) for the 25% tax withheld by the foreign taxation authority in respect of the lump sum payment? | A3: Yes.

Relevant facts and circumstances: You migrated to Australia in the 2013-14 income year and became a resident of Australia for tax purposes at that time. You hold a retirement savings plan with a foreign fund (the Fund). You intend to redeem your interest in the retirement savings plan in the form of a lump sum payment. You have not made any contributions to the Fund since you became a resident of Australia. No amounts have been transferred into the Fund from other foreign superannuation funds after you became a resident of Australia. The retirement savings plan is not a 'locked-in' retirement savings plan as the Fund allows for access of benefits prior to retirement age for reasons such as purchasing a first home or for meeting certain educational expenses.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 97. | Income Tax Assessment Act 1936 Section 98. | Income Tax Assessment Act 1936 Section 99. | Income Tax Assessment Act 1936 Section 99A. | Income Tax Assessment Act 1936 Section 99B. | Income Tax Assessment Act 1936 Section 102 AAZD. | Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Section 10-5. | Income Tax Assessment Act 1997 Section 770-10. | Income Tax Assessment Act 1997 Section 770-15. | Income Tax Assessment Act 1997 Section 770-70. | Income Tax Assessment Act 1997 Section 770-140.

Reasons for decision: Detailed Reasoning - Lump sum payments from foreign superannuation funds:: Where a person receives a lump sum payment from a foreign superannuation fund more than six months after the person became a resident of Australia, section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) will operate to include the applicable fund earnings in the person's assessable income. The applicable fund earnings are the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. However, before determining whether an amount is assessable under subsection 305-70(2) of the ITAA 1997, 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 subsection 305-70(2) will not have any application. | Detailed Reasoning - 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 funds 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. Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), 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; | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (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 Commissioner of Taxation (Cth) (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 SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the following events occur: (a) on or after retirement from gainful employment; or (b) attaining a prescribed age; and (c) on the member's death. (This may require the benefits being passed on to a member's dependants or legal representative). Though section 62 of the SIS Act also allows a superannuation fund to provide benefits for 'ancillary purposes', such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses et cetera. Notwithstanding the SIS Act applies only to 'regulated superannuation funds', as defined in section 19 of the SIS Act, and foreign superannuation funds do not qualify as regulated superannuation funds, as they are established and operate outside Australia, the Commissioner views the SIS Act (and its 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 SIS Act. Therefore, notwithstanding the fact that a foreign 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: (a) can also be used as a savings plan for non-retirement purposes; and/or (b) contains provisions for pre-retirement withdrawals for general non-retirement purposes such as housing, education and medical expenses et cetera. In this case, it is noted that the fund satisfies some of the requirements of a foreign superannuation fund as it is established and operated outside Australia and the central management and control is outside of Australia. However, the fund is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purposes of the individual's retirement. Members can withdraw benefits to purchase a first home or for meeting certain educational expenses. In other words, the fund provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes. Accordingly, the fund does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance. | Detailed Reasoning - Distributions from a foreign trust: The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)). Your withdrawal from the Fund account is not ordinary income (subsection 6-5(2) of the ITAA 1997). 'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with receipt of trust income not previously subject to tax. 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: (a) 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; or (b) amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; (c) amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A; or (d) and amounts included in assessable income under section 102AAZD of the ITAA 1936 (that is, amount included under the transferral trust measures for taxpayer having transferred property or services). The Fund is treated as a trust set up in the foreign country; a foreign trust. Since you are an Australian resident, who will make a withdrawal from a foreign trust, the amounts withdrawn from the Fund are similar to distributions from a trust and would be assessable under subsection 99B(1) of the ITAA 1936. However, the amount assessable under subsection 99B(1) of the ITAA 1936 does not include amounts listed under subsection 99B(2). A withdrawal of an amount that represents amounts deposited by you, 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). Only the income accumulated in the Fund paid to you as a resident taxpayer that is normally taxable in Australia and had not been previously subject to tax in Australia would be assessable to you under subsection 99B(1) of the ITAA 1936. In this case, it is the gross amount withdrawn, converted to Australian dollars, less the amount that represents your deposits, converted to Australian dollars, that is the amount assessable under subsection 99B(1) of the ITAA 1936. Amounts assessable under subsection 99B(1) of the ITAA 1936 form part of your assessable income under subsection 6-10(4) of the ITAA 1997. This amount would be included at question 20 label E in the supplement section as 'Assessable foreign source income'. | Detailed Reasoning - Foreign income tax offset (FITO): Subsection 770-10(1) of the ITAA 1997 provides that FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for the income year, only a proportionate share of the foreign income tax paid (the share that corresponds to the part that is assessable income) will count towards the tax offset. Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains (subsection 770-15(1) of the ITAA 1997). The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source. However, section 770-140 of the ITAA 1997 will deem you not to have paid foreign income tax to the extent that you or any other associated entity become entitled to a refund of the foreign income tax. In your case, you will be entitled to claim a FITO for tax paid to the foreign revenue authority in relation to that portion of your withdrawals that are assessable in Australia; and conversely, the foreign tax paid in relation to the withdrawal of your contributions will not be eligible for FITO. You will include your FITO at question 20 label O in the supplement section as a 'Foreign income tax offset'. The actual amount of any FITO available to you will be dependent on how the tax is calculated and your foreign tax offset cap for the year. The cap is an upper limit of the amount of FITO that can be allowed (section 770-70 of the ITAA 1997). This cap is generally based on the amount of Australian tax payable on the double-taxed amounts. A taxpayer does not need to calculate the foreign tax offset cap if they elect to use the $1000 'de minimise cap'. If a taxpayer elects this, they cannot claim more than $1000 of the foreign income tax paid. For more information on calculating your foreign tax offset cap see our Guide to foreign income tax offset rules 2013-14 which can be found on our website www.ato.gov.au.