Private ruling: Assessability of lump sum payment
Published: December 2013
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Issue 1 | Questions and answers: | 1. Are any proceeds that you received as a result of a marriage breakdown assessable as ordinary income? | No. | 2. Will CGT event C2 occur when you dispose of your right to receive a lump sum as a result of your marriage breakdown? | Yes. | 3. Are you entitled to disregard any capital gain or loss that results from CGT event C2? | Yes.

Relevant facts and circumstances: Issue 1 You are an Australian citizen. In 20XX, you married a country Y citizen in country X. After the marriage you lived with your spouse in the country Y. After a number of years you and your spouse moved to Australia. Shortly after moving to Australia you and your spouse separated. You are currently in the process of finalising your divorce. Contained within the terms of your divorce settlement is a proposal that your ex-spouse pay you their independent retirement account (IRA). Should you accept the terms of your divorce settlement you would receive a payment in the form of a lump sum. You intend to transfer the lump to Australia on receipt. You expect to receive the payment with the next X years. You are currently determining whether to accept the terms contained within the divorce settlement. Issue 2 As part of your divorce settlement you are contemplating the receipt of a portion of your spouse's interest in a IRA. Benefits in an IRA can be accessed at any time and used for purposes such as: · collateral for loans · to cover medical insurance · to pay for higher expenses of the participant, spouse, children or grandchildren and · to fund expenses relating to the purchase of the participant's first home

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 108-5(1) | Income Tax Assessment Act 1997 Section 118-75 | Income Tax Assessment Act 1997 Subsection 295-95(2) | Income Tax Assessment Act 1997 Section 305-55 | Income Tax Assessment Act 1997 Section 305-60 | Income Tax Assessment Act 1997 Section 305-65 | Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Subsection 305-70(1) | Income Tax Assessment Act 1997 Section 305-75 | Income Tax Assessment Act 1997 Subsection 305-75(2) | Income Tax Assessment Act 1997 Subsection 305-75 (3) | Income Tax Assessment Act 1997 Subsection 305-75 (5) | Income Tax Assessment Act 1997 Subsection 305-75 (6) | Income Tax Assessment Act 1997 Subsection 306-70 | Income Tax Assessment Act 1997 Subsection 960-50(1) | Income Tax Assessment Act 1997 Subsection 960-50(4) | 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: Detailed Reasoning - Issue 1: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a 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. | Detailed Reasoning - Your circumstance: In your case, you are determining whether to accept the terms of settlement as a result of your marriage breakdown. The terms contained within the proposed settlement are such that you will receive a lump sum payment from your ex-spouses IRA. This payment does not have the characteristics of ordinary income as it has not been earned although it is expected and perhaps relied upon it does not have an element of periodicity, recurrence or regularity. Accordingly, the proposed lump sum payment that you will receive is not ordinary income and therefore not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Statutory income: Section 102-20 ITAA 1997 provides that you can only make a capital gain or loss if a capital gains tax (CGT) event happens to a CGT asset. Subsection 108-5(1) (b) of the ITAA 1997 specifically includes a legal or equitable right that is not property within the definition of a CGT asset. The most common event is CGT event A1, however in your case CGT event C2 is applicable. Under section 104-25 of the ITAA 1997, CGT event C2 occurs if your ownership of an intangible CGT asset ends in certain ways, such as by the cancellation, surrender or similar endings. However, in certain circumstances, there may be an exemption or exception that can apply, which means that the gain or loss created by the CGT event is disregarded. Section 118-75 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or loss which is made in relation to the cancellation of a right resulting from the breakdown of a marriage is disregarded if: a) you make the gain or loss in relation to a right that directly relates to the breakdown of a marriage or de facto marriage; and b) at the time of the CGT event: I. you and your spouse or former spouse are separated; and II. there is no reasonable likelihood of cohabitation being resumed. | Detailed Reasoning - Your circumstances: When you accept the settlement terms of your divorce which include the agreement to accept a lump sum payment from your ex-spouse's IRA you would have acquired a right to receive this payment. This right is a tangible CGT asset, under section 108-5 of the ITAA 1997. When you receive the proposed lump sum payment from your ex-spouse your ownership of this asset (right to receive a lump sum payment) will end by the asset being released or surrendered. Therefore, under subsection 104-25(1) of the ITAA 1997, CGT event C2 will occur. However, as CGT event C2 has occurred as a result of a marriage breakdown and you have met the conditions outlined under section 118-75 of the ITAA 1997, any capital gain or loss is disregarded. Accordingly, you are entitled to disregard any capital gain or loss that results from CGT event C2, under the terms of your marriage settlement, under section 118-75 of the ITAA 1997. | Summary: The proposed payment from a IRA as part of your divorce settlement, is not considered to be a payment from a foreign 'superannuation fund' and therefore, subdivision 305-B of the ITAA 1997 has no application in this case. Consequently, any proposed lump sum transfer from the IRA to an Australian superannuation fund, has no tax implications under subdivision 305-B of the ITAA 1997 in this case. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) deals with superannuation benefits paid from foreign superannuation funds. Section 305-55 of the ITAA 1997 restricts the application of the subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death. Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax free. It is not assessable income and is not exempt income [sections 305-60 and 305-65 of the ITAA 1997]. Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency or termination of foreign employment, section 305-70 applies to include any applicable fund earnings in assessable income. Before determining whether an amount is exempt under sections 305-60 or 305-65 of the ITAA 1997, or assessable under section 305-70 , it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund, then subdivision 305-B will not have any application. | Detailed Reasoning - 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. Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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. However, part of the definition of a foreign superannuation fund also requires consideration of what constitutes a superannuation or retirement fund. 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 (SIS Act), which requires that the fund is a provident, benefit, superannuation or retirement fund. | Detailed Reasoning - 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 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: · 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 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 the SIS 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, in order for the lump sum payment from the overseas fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2). This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above. Information available indicates that benefits in an IRA can be accessed at any time (albeit subject to a penalty tax rate). Benefits in an IRA can be used for purposes such as: · collateral for loans · to cover medical insurance · to pay for higher educational expenses of the participant, spouse, children or grandchildren and · to fund expenses relating to the purchase of the participant's first home. As the benefits in an IRA can be accessed for pre-retirement purposes, an IRA does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes. Therefore, on the basis of the information provided, the Commissioner considers a lump sum payment from an IRA is not from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. Consequently, subdivision 305-B of the ITAA 1997 will have no application in this case, if you are to receive a lump sum payment from an IRA as part of your divorce settlement.

Question and answer: 4. Is any part of a payment from an Individual Retirement Account (IRA) established in the included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?