Private ruling: Lump sum payment from a foreign retirement product
Published: March 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is your client's foreign retirement product (the Fund) a 'foreign superannuation scheme' under subsection 305-55(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. Issue 2 | Q2: Is any part of the lump sum payment from the Fund included in your client's assessable income as applicable fund earnings? | A2: No. Issue 3 | Q3: Is any part of the lump sum payment from the Fund assessable as ordinary income? | A3: No. | Q4: Is any part of the lump sum payment from the Fund assessable as a distribution from a foreign trust? | A4: Yes. | Q5: Will your client be entitled to claim a partial foreign income tax offset for the foreign tax withheld in respect of the lump sum payment from the Fund? | A5: Yes.

Relevant facts and circumstances: Your client was an overseas citizen who became an Australian resident for tax purposes in the 2011-12 income year. Your client held a retirement product (the Fund) which was established overseas. The Fund is a retirement savings plan which allows a person to build and manage their own investment portfolio by buying and selling a wide variety of investments which are tax-sheltered. The Fund's rules allow withdrawals for non-retirement purposes. No contributions were made by your client, or anyone on your client's behalf, to the Fund since your client became an Australian resident. Documentation provided shows: (a) your client's Fund used the services of an overseas based finance company; and (b) the total market values of your client's investments in the Fund at various dates. In the 2013-14 income year your client closed the Fund. Documents have been provided which show the gross amount redeemed from the Fund and tax withheld which withheld on the redemption by the tax authority in the overseas country. The monies redeemed from the Fund were deposited by your client into a bank in the overseas country. Your client intends to transfer the Fund's monies from the overseas bank account to an Australian bank account in the 2013-14 income year. Your client is less than 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1936 S ection 97 | Income Tax Assessment Act 1936 S ection 98 | Income Tax Assessment Act 1936 Section 99 | Income Tax Assessment Act 1936 S ection 99A | Income Tax Assessment Act 1936 Subsection 99B(1) | Income Tax Assessment Act 1936 Subsection 99B(2) | Income Tax Assessment Act 1936 Section 102AAZD | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 305-55(2) | Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Section 305-75 | Income Tax Assessment Act 1997 Subsection 770-10(1) | Income Tax Assessment Act 1997 Subsection 770-15(1) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section19 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: Your client's retirement product (the Fund) is not a superannuation fund or a scheme for the provision of superannuation benefits. Hence, the provisions in the Income Tax Assessment Act 1997 relating to applicable fund earnings do not apply in your client's case. However, the gross amount withdrawn from the Fund converted to Australian dollars, less the amount that represents your client's deposits converted to Australian dollars, is the amount assessable to your client under subsection 99B(1) of the ITAA 1936. Further, your client will be entitled to claim a foreign income tax offset that corresponds to the foreign tax paid on the proportion of the lump sum that is included in your client's assessable income. | Detailed Reasoning - Questions 1 and 2: Section 305-55 of the Income Tax Assessment Act 1997 (ITAA 1997), which deals with the 'Restriction to lump sums received from certain foreign superannuation funds' in Subdivision 305-B, states: (1) This Subdivision applies if: (a) you receive a superannuation lump sum from a foreign superannuation fund (emphasis added); and (b) the fund is an entity mentioned in item 4 of the table in subsection 295-490(1) (which deals with deductions for superannuation entities). (2) This Subdivision also applies if you receive a payment, other than a pension payment, from a scheme (emphasis added) for the payment of benefits in the nature of superannuation upon retirement or death that: (a) is not, and never has been, an Australian superannuation fund or a foreign superannuation fund; and (b) was not established in Australia; and (c) is not centrally managed or controlled in Australia. (3) This Subdivision applies to a payment mentioned in subsection (2) from a scheme mentioned in that subsection in the same way as it applies to a superannuation lump sum from a foreign superannuation fund. In view of the above, one of the main items to be ascertained is whether the retirement product (the Fund), the source from which your client's lump sum payment (the Payment) is made, is a foreign superannuation fund. | Detailed Reasoning - Is the Fund a foreign superannuation fund?: Under subsection 995-1(1) of the ITAA 1997 a foreign superannuation fund is defined as: (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 995-1(1) of the ITAA 1997 also defines an Australian superannuation fund as having the meaning given by section 295-95, that is basically, a fund that was established in Australia and its central management and majority of active members are located in Australia. Further, it should be noted that subsection 995-1(1) of the ITAA 1997 also defines a superannuation fund as has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), 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. (emphasis added) | 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 be exclusively 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 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 a foreign 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. | Detailed Reasoning - The Fund: Your client's Fund is a type of registered retirement savings plan which allows its owner to determine the asset mix held in the trust. The Fund is registered under the provisions of the income tax legislation in the overseas country any income earned in the such a fund is usually exempt tax in the overseas country for the period the benefits remain in the fund. A participant in such funds may make contributions to them up until the year in which the participant attains a specific age. A deduction up to prescribed limits may be claimed under the overseas country's tax laws for contributions made to those funds. Partial withdrawals from the funds may be made at any time. However, the withdrawal is subject to tax under the overseas country's tax laws in the year in which the withdrawal is made. Withdrawals up to certain prescribed limits may be made from the funds for various non-retirement purposes. These withdrawals are not subject to this countries income tax. One of the purposes, which are relevant in this case, is a program that allows a participant to withdraw, up to a specified amount, to purchase or build a qualifying home. Amounts withdrawn must be repaid to the fund with a specified period. Any amount that is not repaid will be subject to tax under the overseas country's tax laws in the year in which the amount was due. In the year in which a participant turns a specified age the monies in these funds must be: • withdrawn; • transferred to a retirement income fund (RRIF); • used to purchase an annuity for life; or • used to purchase an annuity for a fixed term. Though your client's Fund is foreign based and controlled, and provides retirement benefits, it is not considered a foreign superannuation fund. The Fund does not satisfy the requirement of being a provident, benefit, superannuation or retirement fund as, apart from permitting withdrawals (subject to prescribed limits) to purchase or build a qualifying home, under the overseas country's tax laws, the Fund also permits withdrawals at any time. In other words the Fund provides for the payment of benefits 'for any other reason whatsoever' and not solely (that is, exclusively) for retirement purposes. As the Fund is not a foreign superannuation fund for the purposes of the ITAA 1997, or a scheme for the payment of superannuation benefits, section 305-55 does not apply in your client's case. Accordingly, the tax treat of the Payment made from your client's Fund requires consideration under other provisions of the ITAA 1997. | Detailed Reasoning - Ordinary income: Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned • are expected • are relied upon, and • have an element of periodicity, recurrence or regularity. In your client's case all the funds held in the Fund were withdrawn as a lump sum. As such, the amount your client received did not have any element of periodicity, recurrence or regularity so is not considered to be ordinary income. Therefore, the lump sum your client received is not assessable as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Foreign trust income: Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income. Section 10-5 of the ITAA 1997 lists those provisions that are concerned with 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 in Australia. In your client's case, your client held the Fund with a financial services provider in an overseas country. With investments of this type, a 'trust' relationship exists as the financial services provider holds property, such as cash or shares, for the benefit of the investor. Further, the Fund was a foreign trust as it was established in an overseas country. 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. However, 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 99B(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; or (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) 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). Since your client is an Australian resident, the amount withdrawn from the Fund is similar to a distribution from a trust and would usually be assessable under subsection 99B(1) of the ITAA 1936. However, the withdrawal of an amount that represents amounts previously deposited to the Fund by your client, would come within paragraph 99B(2)(a) of the ITAA 1936; that is, the amount would be considered to represent the corpus (capital) 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). Only the income accumulated in the Fund paid to your client as a resident taxpayer that is normally taxable in Australia and had not previously been subject to tax in Australia will be assessable to your client under subsection 99B(1) of the ITAA 1936. In your client's case, it is the gross amount withdrawn converted to Australian dollars, less the amount that represents your client's deposits converted to Australian dollars, is the amount assessable under subsection 99B(1) of the ITAA 1936. | Detailed Reasoning - Foreign income tax offset: Subsection 770-10(1) of the ITAA 1997 provides that a foreign income tax offset (FITO) can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. 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. 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. In this case, your client will be entitled to claim a FITO that corresponds to the foreign tax paid on the proportion of the lump sum that is included in your client's assessable income.