Private ruling: Foreign lump sum payment
Date of advice: 5 February 2025
Published: 17 March 2025

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. | Q2: Is any part of a lump sum payment to you from the Fund applicable fund earnings under section 305-75 of the ITAA 1997? | A2: No. | Q3: Will you be assessed on withdrawals from the Fund under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: Yes. This private ruling applies for the following period: Income year ending 30 June 20XX

Relevant facts and circumstances: While working overseas you became a member of the Fund. You returned to Australia in July 20XX. You were an Australian resident for tax purposes for the entire time you were abroad. During the 20XX income year you received a lump sum payment from the Fund. You also commenced receiving pension payments from the Fund. The Fund has provided a statement of your total personal contributions during the period of your membership. Employer contributions were stated as being twice this amount. In general, Fund retirement benefits can be accessed from the age of 55. In accordance with the governing rules of the Fund, a member can take a withdrawal settlement of their contributions prior to retirement. This can occur when they separate from employment and are less than their normal retirement age.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99B | Income Tax Assessment Act 1997 subsection 295-95(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) | Supe rannuation Industry (Supervision) Act 1993 subsection 10(1) | Supe rannuation Industry (Supervision) Act 1993 section 62

Reasons for decision: Detailed Reasoning - Tax treatment for the lump sum payments received from overseas fund: Section 305-70 of the ITAA 1997 provides that where the Taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, they include the 'applicable fund earnings' of the lump sum (if any) in their assessable income. Applicable fund earnings are worked out under section 305-75 of the ITAA 1997. If the entity making the lump sum payment is not a foreign superannuation fund, then section 305-70 of the ITAA 1997 will not have any application. | 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. | 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 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 Fund 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 Fund allows withdrawal of benefits when members reach retirement age, or upon their death, invalidity or the cessation of their employment. Those are purposes consistent with the Fund being a superannuation fund. However, the Fund also allows a member to take a withdrawal settlement of their contributions prior to retirement. This can occur when they separate from their employment and are less than their normal retirement age. The Fund satisfies some of the requirements of a foreign superannuation fund, however in general 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 upon separation from the employer. 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 lump sum benefit from the Fund will not be a payment from a foreign superannuation fund and section 305-70 of the ITAA 1997 will not have any application. The payment will instead be assessable to the taxpayer under section 99B of the ITAA 1936. | Detailed Reasoning - Foreign trust income: A distribution from the Fund 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 Fund includes any amounts previously deposited into the Fund by you and your employer. The lump sum may also include amounts that represent earnings of the Fund. Fund earnings are not taken to represent corpus, as the earnings are attributable to income derived by the Fund 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 Fund by you and your employer is excluded from your assessable income, and (b) the proportion of any lump sum that represents earnings of the Fund (from the commencement date of the Fund) is included in your assessable income. Regarding a partial lump sum payment received in conjunction with an annual pension payment, information may be obtained from the Fund for the contribution component of the lump sum payment. It should be noted that the benefit amount withdrawn from the Fund, prior to the deduction of tax, is the amount to be used in the calculation. | Detailed Reasoning - Foreign income tax offset: The foreign income tax offset (FITO) provisions are contained in Division 770 of the ITAA 1997. You may get a non-refundable tax offset for foreign income tax paid on your assessable income. There is a limit on the amount of the tax offset. A resident of a foreign country does not get the offset for some foreign income taxes. The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax - even if you paid the foreign income tax in another income year. If the foreign income tax has been paid on an amount that is only part assessable income, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset. You may pay income tax in America in relation to the withdrawal. A portion of the lump sum will be included in your Australian income tax return. You are entitled to claim FITO for the income tax paid in America to the extent that it relates to the proportion being included in your assessable income. The offset is claimed in the same year that the income is included in your return. There is a limit on the amount of the tax offset for a year (section 770-75 of the ITAA 1997). If you claim an offset of $1,000 or less, you only need to record the actual amount of foreign income tax paid that counts towards the offset. If you claim more than $1,000, you will have to work out your foreign income tax offset limit. You can find more information about how to do this on our website, searching for QC 72280. [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.