Private ruling: Foreign superannuation fund
Date of advice: 11 December 2017
Published: April 2018
Ruling period: Income year ended 30 June 201C
Date scheme commenced: 1 July 201B

Ruling: Q1: Is the retirement fund located and established in a foreign country a ‘foreign fund’ within the meaning of that expression in section 995-1 of the I ncome Tax Assessment Act 1997 (ITAA 1997), including for the purposes of Division 305 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: In 200A the Fund was established by a Deed of Trust made between two companies, Company 1 and Company 2. The trustee of the Fund is a company (the Trustee) which is part of a group that is a global independent provider of trust, fiduciary, corporate and fund services. Company 1 and Company 2 were both incorporated overseas with their registered offices overseas. The original Trust Deed has been added to and varied over time by various variation Deeds. The Trustee holds a trust business licence under the relevant foreign legislation in respect of the Fund. It is also licensed by the relevant monetary authority. Meetings of the Trustee’s directors are all conducted overseas. Less than 20% of the Fund’s portfolio of assets is invested in Australian assets. Approximately 30% of the total members of the Fund are Australian residents. The managers appointed by the Trustee to manage the Fund assets are located overseas except one Australian fund manager who manages less than 0.5% of the Fund’s assets. The Trustee wants to offer fund membership to employees of Australian public companies, their subsidiaries and affiliates working outside Australia. These members will be ordinary members. The target employees will include Australian residents, former Australian residents who may return to Australia and foreigners who subsequently become Australian residents. The retirement benefit payable to ordinary members are calculated according to their own individual accumulation account with the Fund. The Fund has a few discretionary class members who are all non-residents working for non-resident companies. The amount of benefit payable to a discretionary class member from assets of the Fund allocated to the discretionary class is subject to the Trustee’s discretion. The Trust Deed (the Deed) of the Fund states that the Fund is established and maintained solely for the purpose of providing superannuation benefits for members in the event of their retirement or in certain circumstances, for the dependants of members. The Deed provides the rules relating to contributions made to the Fund. Under the Deed, no member, beneficiary, relative of either, has the right to borrow against the security of any of the benefits expected to be received under the Deed. The Deed provides the preservation conditions for the benefits held in the Fund. The Deed states that the Fund will be wound up if: ● the employer is no longer able to make contributions due to being placed in receivership, liquidation or if the employer permanently terminates its contributions to the Fund by notice in writing to the trustee; or ● there are no further members remaining in the Fund; or ● the Trustee otherwise determines for any reason that the Fund should be wound up. The Deed states that for ordinary members, lump sums or pensions are payable when the member meets one of the following conditions: ● retires; ● reaches the age of 60 years; ● becomes totally and permanently disabled; ● becomes temporarily totally disabled; or ● dies. The Deed states that for discretionary members, benefits will be provided as lump sums or pensions when or anytime after the member: ● retires; ● becomes totally and permanently disabled; or ● retires from gainful employment with the employer and there is no arrangement in place for the member to be re-employed by the employer or associated entity and further the member is not dismissed or due to be dismissed by the employer. The contributions made to the Fund by Australian employers will not include any mandatory superannuation contributions for superannuation guarantee charge purposes. The Deed of Variation states that the Deed and the additions, amendments, alterations, modifications, rescissions and variations are for the benefit of the present and any future members of the Fund and their dependents.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-95(2) | Income Tax Assessment Act 1997 Subsection 295-95(3) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: The Fund is a foreign superannuation fund. | 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. Subsection 295-95(3) of the ITAA 1997 states: A member is covered by this subsection at a time if the member is: (a) a contributor to the fund at that time; or (b) an individual on whose behalf contributions have been made, other than an individual: (i) who is a foreign resident; and (ii) who is not a contributor at that time; and a. for whom contributions made to the fund on the individual's behalf after the individual became a foreign resident are only payments in respect of a time when the individual was an Australian resident. 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 same 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; | Detailed Reasoning - Meaning of ‘provident, benefit, superannuation or retirement fund’: The High Court examined both the terms superannuation fund and fund in Scott v. Federal Commissioner of Taxation (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. Federal Commissioner of Taxation (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 the Superannuation Industry (Supervision) Regulations 1994 (SISR)) 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. In summary, the Fund in this case will be a superannuation fund if it can be established that: ● it is a ‘fund’; ● it is indefinitely continuing; and ● it is a provident, benefit, superannuation or retirement fund | Detailed Reasoning - Fund: According to Justice Windeyer in Scott above, a fund ‘ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised.’ In accordance with the Deed, contributions are made to the Fund for/on behalf of the members of the Fund and then invested by the Trustee with the income therefrom being capitalised until such time as benefits are paid to members on meeting certain conditions. Consequently, in this case, there is a ‘fund’ that is set aside and invested for the purpose of paying benefits to the members of the Fund. | Detailed Reasoning - Indefinitely continuing fund: The Deed states that the Fund will be wound up only if: ● the employer is no longer able to make contributions due to being placed in receivership, liquidation or if the employer permanently terminates its contributions to the Fund by notice in writing to the trustee; or ● there are no further members remaining in the Fund; or ● the Trustee otherwise determines for any reason that the Fund should be wound up. The ruling application states that though the Trustee has the power to wind up the Fund it has not exercised that power and there is no specific date by which it will exercise that power. The Deed does not state that the Fund will be wound up after a specific period. In Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 243 ALR 273 ( Cameron Brae ) it was concluded that the fund was an indefinitely continuing fund where the deed of that fund contained a similar clause, that is, the trustee could wind up the fund for any reason. Therefore it is accepted that there is the intention and expectation that the Fund will be an indefinitely continuing fund. | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: In accordance with the Deed of the Fund its sole purpose is to provide benefits as lump sums or pensions in respect of participating ordinary members when or anytime after the member: ● retires; ● reaches the age of 60 years; ● terminates employment or is absent from employment because of retirement or total disablement; or ● dies. Discretionary members will have lump sums and pensions from the available assets of the Fund as determined by the Trustee when or anytime after the member: ● retires; ● becomes totally and permanently disabled in the opinion of the Trustee; or ● retires from gainful employment with the employer and there is no arrangement in place to for the member to be re-employer by the employer or associated entity and further the member is not dismissed or due to be dismissed by the employer. Therefore it is clear that the benefits paid under the above provisions are payable upon events common to superannuation funds, that is, on retirement, disability or death. Further, a member is not entitled to borrow against the security of benefit entitlements or to receive benefits prior to the above events. Therefore a member is not able to make early withdrawals for purposes other than those relating to retirement, for example, for education, home loans or medical expenses. Consequently, as per Scott , discussed above, the Fund’s sole purpose is to provide benefits for members on retirement. As a result the Fund is a superannuation fund. | Detailed Reasoning - Foreign superannuation fund: As stated above a foreign superannuation fund is a superannuation fund that is not an Australian superannuation fund. In order for a superannuation fund to be an Australian superannuation fund, all of the conditions under subsection 295-95(2) of the ITAA 1997 must be satisfied. In this case, the management and control of the Fund is not in Australia. All of the conditions under subsection 295-95(2) of the ITAA 1997 must be satisfied in order for the Fund to be an Australian superannuation Fund. As the condition under paragraph 295-95(b) has not been met, there is no need to consider the other conditions. The Fund is not an Australian superannuation fund in this case; instead, it is a foreign superannuation fund.

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