Private ruling: Lump sum from a foreign fund
Date of advice: 19 July 2023
Published: 11 September 2023
Ruling period: Year ended 30 June XXXX
Date scheme commenced: 1 July 2023

Ruling: Q1: Is the foreign fund a foreign superannuation fund as defined in subsection 995-1(1) of ITAA 1997? | A1: No. | Q2: Is the lump sum you received from the foreign fund assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You left Australia to work in Country A in XXXX. While in Country A you opened an account with the foreign fund. The contributions to your foreign fund were made by yourself and your employers from around XXXX to the end of XXXX. In XXXX you took early retirement and received no income. You returned to Australia in XXXX to visit family, but due to covid-19 you could not go back to Country A. In XXXX you gave up your Country A permanent residency, decided to stay in Australia permanently and became an Australia resident for tax purposes. At this time, you received a lump sum payment from the foreign fund of your entitlements. You provided a statement dated XXXX detailing the value of your fund of $xxx,xxx You are retired and have had earned no income since XXXX. You have not been required to file a tax return in Country A since XXXX. You have not been required to lodge a tax return in Australia since XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1997 subsection 295-95(2) | Income Tax Assessment Act 1936 section 99B | Superannuation Industry (Supervision) Act 1993 section 10 | Superannuation Industry (Supervision) Act 1993 section 19 | Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision: 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. 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. 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. 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. | Detailed Reasoning - Meaning of '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' 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 accordance with section 62 of the SISA, a regulated superannuation fund must be maintained solely for one or more of the 'core purposes'; or for one or more of the core purposes and for one or more of the 'ancillary purposes'. For the purposes of section 62 of the SISA, 'core purposes' means the provision of benefits: • on or after retirement from gainful employment; or • on attaining a prescribed age; or • on the member's death if the death occurred before the member's retirement or attaining the prescribed age. In accordance with paragraph 62(1)(b) of the SISA, 'ancillary purposes' means: • the provision of benefits on or after termination of member's employment with an employer who had at any time contributed to the fund in relation to the member; or • provision of benefits on or after cessation of work on account of ill-health; or • provision of benefits on member's death if the death of the member occurred after member's retirement. 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 , we consider 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 and the SISR. The foreign 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 use the benefits for other purposes, such as purchasing a house or shares in a housing cooperative. The foreign fund is not a bona fide superannuation fund because its sole purpose is not to provide benefits upon death, invalidity or retirement. Whilst the foreign fund satisfies some of the requirements of a foreign superannuation fund as it is established outside of Australia and the central management and control is outside of Australia, it cannot be said that the foreign fund is set up for the sole purpose of providing benefits in the nature of superannuation. The foreign fund does not meet the definition of a superannuation fund and on this basis we do not consider the foreign fund to be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Foreign trust income: The foreign fund does not meet the definition of a foreign superannuation fund; however, amounts received from the foreign fund are subject to 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 payments 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 excludes certain amounts from being in assessable income under subsection 99B(1). Most relevant to you are: • paragraph 99B(2)(a) excludes 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), and • paragraph 99B(2)(b) excludes amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer. The amount of the lump sum you received may include amounts that represent earnings. Earnings of the trust are not taken to represent corpus, as the earnings are attributable to income derived by the foreign 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: • the proportion of the lump sum that represents amounts previously deposited with the foreign fund by you and your employer is excluded from your assessable income, and • the proportion of the lump sum that represents earnings (from the date you commenced with the foreign fund) is included in your assessable income, as the earnings are attributable to income derived by the trust which would have been subject to tax had the earnings been derived by a resident taxpayer.