Private ruling: Lump sum payment from an overseas fund
Published: July 2012
Ruling period: The years ended 30 June 2007 to 30 June 2012
Date scheme commenced: From 1 July 2006

Ruling: Q1: Is any part of the lump sum payments, received in the 2006-07 to 2011-12 income years from your Fund account established in an overseas country, included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are withdrawals from your Fund account in the overseas country treated as assessable income? | A2: Yes.

Relevant facts and circumstances: You are under the age of 65 years in the 2011-12 income year. Over 20 years ago, you left Australia to live in an overseas country (the overseas country). Whilst living in the overseas country you became a member of a Fund account (the Fund account). The documentation that you provided in response to our request for further information states that your retirement product is from the Fund account. The distribution statements from the payers of the Fund account (for the 2007 and 2008 income tax years and the 2009 and 2010 income tax years in the overseas country) state that the payments are being made from the Fund account. Prior to 2010, you returned to Australia and became an Australian resident for tax purposes (the residency day). Prior to this date you were a resident of the overseas country. You have advised your total value of benefits in the Fund account as at residency date. Under the governing rules of the Fund account you were entitled to a withdrawal of your benefits and withdrew small amounts at various times which you had included in your taxable income. The tax certificates of the overseas country show lump sum payments with amounts of tax withheld in the overseas country, were made to you from the Fund account for the 2007 to the 2010 income tax years of the overseas country. You are now requesting a refund for the tax paid in the overseas country.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2). | Income Tax Assessment Act 1997 Subsection 6-10(2). | Income Tax Assessment Act 1997 Subsection 6-10(4). | Income Tax Assessment Act 1997 Section 23AK. | Income Tax Assessment Act 1997 Section 99B. | Income Tax Assessment Act 1997 Subsection 99B(1). | Income Tax Assessment Act 1997 Subsection 99B(2). | Income Tax Assessment Act 1997 Subsection 481(1). | Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Subdivision 305-B. | Income Tax Assessment Act 1997 Section 305-70. | Income Tax Assessment Act 1997 Subsection 305-75(2). | Income Tax Assessment Act 1997 Subsection 305-75(3). | 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 payments you received in the 2006-07 to 2011-12 income years from the Fund account in the overseas country are not assessable in Australia as 'applicable fund earnings'. | Detailed Reasoning - Detailed reasoning: The payments received by you in the 2006-07 to 2011-12 income years are payments made from the Fund account, as stated on the copies of the distribution statements from both payers of the overseas Fund account for the 2007 income tax year to the 2010 income tax years. | Detailed Reasoning - The Fund account: The Fund account is a trust or custodial account set up in the overseas country for the exclusive benefit of you or your beneficiaries. The account is created by a written document. Your employer is allowed to make deductible contributions to the Fund account for you. Generally, distributions from the Fund account are subject to the withdrawal and tax rules that apply in the overseas country to such accounts. You can withdraw or use the Fund account assets at any time. Early distributions of taxable amounts from the Fund account must be included in your gross income. However, an additional tax generally applies if you withdraw or use the Fund account assets before you have reached a specified age. It is in addition to any regular income tax on that amount. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received more than six months after a person has become an Australian resident will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The applicable fund earnings is subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income. The applicable fund earnings is 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. Before determining whether an amount is assessable under section 305-70 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 section 305-70 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 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. Accordingly, the definitions of a 'foreign superannuation fund' and Australian superannuation fund both incorporate the requirement of being a 'superannuation fund'. The effect of these definitions is that if the Fund account is not a 'superannuation fund', it will not be an Australian superannuation fund or a foreign superannuation fund. Nor can the amount paid to you be a 'superannuation lump sum' and subdivision 305-B of the ITAA 1997 will not apply. Therefore, we are first required to determine if the Fund account is a superannuation fund under the ITAA 1997. | Detailed Reasoning - 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 - 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 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 its attendant 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. Therefore, in order for the lump sum payments from the Fund account to be considered payments from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2). This means that it must be a provident, benefit, superannuation or retirement fund as discussed above. The early withdrawals feature of the Fund account does not satisfy the sole purpose test. Withdrawals can be made at any time for any reason. The Fund accounts are not established solely to pay benefits on retirement (or invalidity or death). In order for a fund to be considered a superannuation fund, it is important that the fund be maintained primarily for retirement purposes and the sole purpose test provides a guide of what are acceptable purposes. Due to certain characteristics of the Fund account, in particular the ability to make early withdrawals for specified purposes with no penalty and withdrawals for non specified purposes at any time with only a small penalty tax, the Fund accounts generally do not meet the conditions required to be considered to be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. In addition, the flexibility of these accounts allow them to be utilised for estate planning purposes and as an investment strategy for minors. These accounts represent a financial instrument in which participants can manipulate to defer current taxes. Therefore, providing for retirement is not the 'sole purpose' of these accounts. The fact that provisions exist for such pre-retirement withdrawals and borrowings without attracting penalties indicates the Fund account can be used as savings plans for non-retirement purposes; features which are not recognised or advocated in funds which are superannuation funds for Australian taxation purposes. | Detailed Reasoning - Conclusion: In view of the above, your Fund account cannot be viewed as a superannuation fund for the purposes of either the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997 as the Fund account is not solely for the provision of retirement benefits. Accordingly, the Fund account does not satisfy the definition of a superannuation fund and so the withdrawals made from your Fund account are not assessable as income under section 305-70 of the ITAA 1997. | Summary: The withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from your Fund account are included in your assessable income. However, a credit for foreign tax paid may apply. | Detailed Reasoning - Assessable income: 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 ITAA 1997). Your withdrawal from your Fund account would not be 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 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: · 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 ITAA1936). 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). In your case, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from your Fund account are assessable under subsection 99B(1) of the ITAA 1936. Any distribution from the Fund account is assessable in your hands subject to the exclusions under subsection 99B(2) of the ITAA 1936. | Detailed Reasoning - The foreign tax credits - 2008 and earlier income years: For the 2008 and earlier income years, subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of: · the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or · the amount of Australian tax payable in respect of the foreign income. Where the foreign tax paid is greater than the Australian tax payable, a taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess foreign tax paid. However under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any tax payable on foreign income earned in the future. | Detailed Reasoning - Foreign income tax offset - from 1 July 2008: From 1 July 2008 the foreign tax credit system was replaced by the foreign income tax offset (FITO) system. A FITO is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax. Section 770-10 of the ITAA 1997 is the primary provision under which a FITO arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. When claiming a FITO, you are required to gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income. The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997). The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source. If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap. In your case, you are entitled to FITO for the income tax withheld from your income in the overseas country limited to the amount to which you are entitled under section 770-10 of the ITAA 1997. | Detailed Reasoning - Note:: More information on the calculation of the FITO cap and entitlements are available on the Tax office website www.ato.gov.au at the link to "Guide to foreign income tax offset rules 2011-12".

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