Private ruling: Lump sum payment from foreign superannuation fund
Date of advice: 21 August 2017
Published: December 2017
Ruling period: Income year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is any part of the lump sum payment from the foreign superannuation fund (the Fund), assessable as 'applicable fund earnings’ under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is the lump sum payment from the Fund included in the Taxpayer’s assessable income? | A2: Yes | Q3: Is the Taxpayer entitled to a foreign income tax offset for income tax paid in the foreign country in respect of the lump sum payment in accordance with section 770-10 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: The Taxpayer was a member of the Fund. The Taxpayer became an Australian resident for tax purposes on the Residency Date. The Taxpayer transferred their entire benefit in the Fund directly to themselves in Australia, with federal tax withheld in the foreign country. There were no contributions or transfers made to the Fund after the Taxpayer became a resident of Australia. The fund rules of the Fund, which indicate that the benefits in the Fund can be accessed upon termination of employment and for loans.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 295-95 | Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Section 770-10 | Income Tax Assessment Act 1997 Section 770-75 | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 62 Summary | The Fund is not considered a 'foreign superannuation fund’ for the purposes of section 305-70 of the ITAA 1997. Therefore, the entire lump sum transferred from the Fund to Australia will be assessable income. | The Taxpayer is entitled to a foreign income tax offset in respect of part or all of the amount that is included in the assessable income for the 2016-17 income year. | Detailed reasoning | Lump sum payments from foreign superannuation funds | If a person receives a lump sum payment from a foreign superannuation fund more than six months after they become an Australian resident, subsection 305-70(2) of the ITAA 1997 will operate to include the 'applicable fund earnings’ in their assessable income. | Before determining whether an amount is assessable under subsection 305-70(2) of the ITAA 1997, it is necessary to ascertain whether the Fund is a 'foreign superannuation fund’. | Meaning of 'foreign superannuation fund’ | A 'foreign superannuation fund’ is defined in subsection 995-1(1) of the ITAA 1997: | (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. | Relevantly, subsection 295-95(2) of the ITAA 1997 defines 'Australian superannuation fund’: | 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. | 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 provides that: | 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. | 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 judgment 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 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 and the SISR. | In this case, information available indicates that as well as providing benefits on retirement, invalidity and death, the Fund also allows for withdrawals prior to retirement, as well as borrowing from the fund. | The Fund does not meet the definition of a 'foreign superannuation fund’ as it does not meet the 'sole purpose test’ and subsection 305-70(2) of the ITAA 1997 will not apply. | Foreign income tax offset | With effect from 1 July 2008, the foreign tax credit (FTC) system has been replaced by the foreign income tax offset (FITO) system contained in Division 770 of the ITAA 1997. | Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to a FITO for foreign tax paid in respect of an amount that is included in the person's assessable income in a year of income. It is not necessary that the payment of foreign income tax actually occurs in the claim year. | To determine the amount of FITO in any particular year, a person must first calculate the total foreign income tax paid on amounts included in their assessable income for that income year. | The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset. | The FITO rules do not allow for the carry forward of excess foreign tax. This means that all available FITO will need to be utilised in the year in which they arise. | Furthermore, there is a FITO limit. Where the total foreign income tax paid by a person is less than or equal to $1,000, the person is not required to calculate the FITO, i.e. the person's FITO will equal the foreign income tax paid on amounts included in the their assessable income. | Where the total foreign income tax paid is more than $1,000, the person can choose to offset only $1,000 of foreign tax (and not formally calculate the FITO entitlement) or calculate the offset limit to determine the maximum FITO entitlement under section 770-75 of the ITAA 1997. | In this case, the entire lump sum payment will be assessable in the 2016-17 income year. The maximum foreign income tax offset available is the foreign tax paid on this assessable amount. If the amount of tax paid is greater than $1,000 the Taxpayer can claim a FITO of either $1,000 or an amount calculated in accordance with subsection 770-75 of the ITAA 1997.