Private ruling: Assessability of foreign lump sum payment
Date of advice: 12 January 2017
Published: June 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Questions and answers | 1. Will any part of a lump sum payment paid to you from the foreign retirement plan be treated as assessable income under subsection 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | No. | 2. Will any part of a lump sum payment paid to you from the foreign retirement plan be included in your assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes. | 3. Will you be entitled to a foreign income tax offset in respect of any foreign tax withheld on funds withdrawn from the foreign retirement plan or otherwise paid to the foreign tax authorities? | Yes.

Relevant facts and circumstances: You are a citizen of Country X and are a tax resident of Australia. You have a retirement plan (the Plan) in Country X. The Plan allows for access of benefits prior to retirement age. You are considering withdrawing funds from the Plan. Country X income tax or withholding tax may be deducted from the amount paid to you.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99B | Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 subsection 99B(2) | Income Tax Assessment Act 1936 paragraph 99B(2)(a) | Income Tax Assessment Act 1997 subsection 295-95(2) | Income Tax Assessment Act 1997 subsection 305-70(2) | 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 | Taxation Administration Act 1953 s ubsection sch 1-357-105(2)

Reasons for decision: Detailed Reasoning - Foreign superannuation fund: If a person receives a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, section 305-70 of the ITAA 1997 will operate to include the applicable fund earnings in the person's assessable income. 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. 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 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'. 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. 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. In your case, it is evident that the Plan can also be used as a savings plan for non-retirement purposes as members can withdraw funds prior to retirement. Accordingly, the Plan does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 has no application. | Detailed Reasoning - Receipt of foreign lump sum: A fund in the nature of a retirement fund or plan is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder. Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary. However, subsection 99B(2) of the ITAA 1936 operates to exclude certain amounts from the assessable income of the beneficiary. Specifically, paragraph 99B(2)(a) of the ITAA 1936 provides that assessable income will not include the corpus (capital) of the trust - but not an amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer. In your case, the conditions in subsection 99B(1) of the ITAA 1936 will be satisfied as you will receive an amount of trust property during an income year in which you are a resident. However, the receipt of an amount that represents amounts previously deposited to the Plan by or on your behalf, would come within paragraph 99B(2)(a) of the ITAA 1936; that is, the amount would be considered to represent the corpus of the trust. Distributions, to the extent that they come within subsection 99B(2) of the ITAA 1936, are excluded from amounts assessable under subsection 99B(1) of the ITAA 1936. Only the income accumulated in the Plan paid to you as a resident taxpayer that is normally taxable in Australia and had not previously been subject to tax in Australia will be included in your assessable income. Therefore, it is the gross amount you will receive converted to Australian dollars, less the amount that represents deposits to the Plan converted to Australian dollars, that will be the amount assessable under subsection 99B(1) of the ITAA 1936. | Detailed Reasoning - Foreign income tax offset: Section 770-10 of the ITAA 1997 provides that you are entitled to claim a foreign income tax offset for foreign income tax paid in respect of an amount that is included in your assessable income. Section 770-15 of the ITAA 1997 specifies that foreign income tax means tax that is imposed under a law other than an Australian law and is: ● tax on income ● tax on profits or gains, whether of an income or capital nature, or ● any other tax that is subject to an agreement covered by the International Tax Agreements Act 1953 (Agreements Act). A taxpayer is deemed to have paid the foreign income tax if the foreign tax has been withheld from the income at its source (section 770-130 of the ITAA 1997). In considering the entitlement to a foreign tax credit for Country X tax paid, it is necessary to consider not only Australia's domestic income tax law but also the Country X Convention contained in the Agreements Act. An article of the Country X convention provides that Australia will allow a credit for Country X tax on income derived by a resident of Australia from sources in Country X. Therefore, you are entitled to claim a foreign income tax offset for any US income tax paid in respect of any withdrawal made from the Plan.