Private ruling: Lump sum transfer from a foreign fund
Date of advice: 20 September 2018
Published: November 2018
Ruling period: Period ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the lump sum payment received from the Overseas Fund represent applicable fund earnings to be included in your assessable income? | A1: No. | Q2: Will the lump sum payment received from the Overseas Fund be included in your assessable income? | A2: Yes.

Relevant facts and circumstances: You became a resident of Australia for taxation purposes in 20XX. You held an interest in an Overseas Fund (the Overseas Fund). According to information obtained from the Overseas Fund website, the Overseas Fund allows access to some benefits prior to retirement age. These include, inter alia: ● Members being able to withdraw in full or part of their savings from an account in the Overseas Fund Account 2 upon reaching age 50. ● Members being able to withdraw from their savings in an account in the Overseas Fund to finance the purchase of a house. ● Members being able to withdraw from their savings in an account in the Overseas Fund for education, medical expenses and investments. Your balance in the Overseas Fund on in 2007 was a certain amount. You have made no contributions nor have there been amalgamations to the Overseas Fund since becoming a resident of Australia. Your balance in the Overseas Fund on in 2018 was a certain amount. Upon reaching the overseas country’s retirement age of 55, you became eligible to make a full withdrawal of your benefits from the Overseas Fund. You withdrew the full amount of the balance from the Overseas Fund during 20XX. You transferred the sum from your overseas bank in a number of tranches into your Australian bank account and subsequently deposited the full sum into your Australian superannuation fund.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 97 | 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 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 6-10(4) | Income Tax Assessment Act 1997 section 10-5 | 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) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 19 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: There are no applicable fund earnings as the Overseas Fund does not fall within the definition of a foreign superannuation fund. | 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 Income Tax Assessment Act 1997 (ITAA 1997) will operate to include the applicable fund earnings in the person’s assessable income. However, if the entity making the payment is not a foreign superannuation fund then section 305-70 will not have any application. 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 (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 - 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 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 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 SISA 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 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 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 SISA. 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, education and medical expenses. It is noted that the Overseas Fund satisfies some of the requirements of a foreign superannuation fund as it is established and operated outside Australia and the central management and control is outside of Australia. However, the Overseas 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 prior to retirement age. In other words, the Overseas Fund provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes. Accordingly, the Overseas Fund does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance. | Summary: Income that is withdrawn from the Overseas Fund is similar to a distribution from a trust with any amounts distributed (withdrawn) or credited from your account being assessable under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) less any amounts excluded under subsection 99B(2). | Detailed Reasoning - Assessability of trust income: Section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year. Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the ITAA 1936. 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, the amount is to be included in the assessable income of the beneficiary. 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: ● the corpus of the included in the beneficiaries income trust (paragraph 99B(2)(a) of the ITAA 1936) ● amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and ● amounts previously under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936). Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936). In this case, you received a lump sum from the Overseas Fund, at the time of the withdrawals it is deemed that income has been paid to you or applied for your benefit. Therefore, withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from the Overseas Fund are assessable under subsection 99B(1) of the ITAA 1936 less any amounts that would fall under subsection 99B(2).