Private ruling: Taxation of a foreign lump sum payment
Date of advice: 19 December 2024
Published: 28 January 2025
Ruling period: Year ending 30 June 20YY

Ruling: Q1: Is the overseas fund (the Fund) a 'foreign superannuation fund' as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is any part of a lump sum payment to you from the Fund applicable fund earnings under section 305-75 of the ITAA 1997? | A2: No. | Q3: Is any part of a lump sum payment to you from the Fund assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: Yes.

Relevant facts and circumstances: You were a member of the overseas Fund. You moved to Australia and have an Australian permanent residency visa. You received an Exit Statement from the Fund. You received a lump sum payment from the Fund. You no longer have an interest in the Fund. Under the rules of the Fund, a member may access benefits in the following circumstances: • Members who qualify can withdraw benefits to assist them to purchase or build their home. • A member can withdraw their total benefits if they permanently emigrate from the country. • If a member is unemployed for 12 months or more, they are entitled to a full withdrawal of their benefits.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99B | 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 subsection 10(1) | Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision: Detailed Reasoning - Tax treatment for the Lump sum payments received from overseas entity: Section 305-70 of the ITAA 1997 provides that where the Taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, they include the 'applicable fund earnings' of the lump sum (if any) in their assessable income. Applicable fund earnings are worked out under section 305-75 of the ITAA 1997. If the entity making the lump sum payment is not a foreign superannuation fund, then section 305-70 of the ITAA 1997 will not have any application. | 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. Relevantly, 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. | Detailed Reasoning - 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. | Detailed Reasoning - Meaning of 'provident, benefit, superannuation or retirement fund': Whether the Fund is a foreign superannuation fund requires consideration of the meaning of the term 'provident, benefit, superannuation or retirement fund' in subsection 10(1) of the SISA. Each of these terms are not defined in the ITAA 1936, ITAA 1997, the SISA or elsewhere in the tax acts. Accordingly, those terms will derive their meaning from their ordinary meaning and the relevant case law. In the context of considering the term 'provident, benefit or superannuation fund established for the benefit of employees', in former subparagraph 23(j)(i) of the ITAA 1936, the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 ( Mahony ) considered that this phrase denoted 'a purpose narrower than the conferral of benefits in a completely general sense' and had to be characterised by 'some specific future purpose'. In the case of a provident fund, against 'contemplated contingencies; in the case of a superannuation fund 'on retirement, death or cessation of employment'; and, in the case of a benefit fund 'a benefit characterised by some specific future purpose' (e.g. a funeral fund). Furthermore, Justice Kitto's judgement in Mahony indicated that a fund does not satisfy any of the three provisions, that is, either a 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. A similar approach was also adopted by Taylor J and Windeyer JJ in Mahony who said: ...In other words, if they could, keeping within the terms of the trust, apply the fund or any portion thereof to purposes foreign to the true purposes of such a fund, then it would not be such a fund. Accordingly, the purpose of the fund must be solely consistent with it being a 'provident, benefit or superannuation fund'. Similar observations have been made in a number of other authorities. In the context of what constitutes a 'superannuation fund' and a 'fund', Justice Windeyer in Scott v. Federal Commissioner of Taxation (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333emphasised the 'sole purpose' requirement, stating: ...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. More recently, in considering the term 'provident, benefit, superannuation or retirement fund' as it now appears in the definition of 'superannuation fund' in subsection 10(1) of the SISA, Senior Member FD O'Loughlin in Baker v. FC of T [2015] AATA 469 (Baker) stated at [16]: Accordingly, a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund. Whilst the Senior Member in Baker made reference to 'benefits not permitted by the Supervision Act' in the context of considering whether a particular fund which was not a 'provident, benefit or retirement fund' was a 'superannuation fund', it is noted that section 62 of the SISA largely replicates the relevant case law and requires the fund be 'maintained solely' for one or more of the 'core purposes' of providing benefits to a member when the events occur: • on or after retirement from gainful employment; • attaining a prescribed age; or • on the member's death (this may require the benefits being passed on to a member's dependants or legal representative). Whether a fund has been established for the requisite purpose required, is determined by considering the terms of the trust deed. This is an objective determination, and it is not determined by the subjective intentions of the parties. Whether a particular arrangement constitutes a superannuation fund is dependent upon the facts and circumstances of the case. Regard is had to the terms of the constituent arrangements and what the relevant trustee can and cannot do, and is and is not obliged to do, with the trust assets and property. As Taylor and Windeyer JJ observed in Mahony : It thus becomes necessary to look carefully and critically at the terms of the trust deed, at what is required and what is permitted - that is to say in what ways the trustees might, without any breach of the trusts it imposes, apply the trust property. In the present case, the Fund allows that benefits may be paid to the member in the following circumstances: • Permanent departure from Papua New Guinea. • To withdraw benefits to assist them to purchase or build their home. • To withdraw total benefits where a member has been unemployed for greater than 12 months. The Fund satisfies some of the requirements of a foreign superannuation fund, however in general the 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 to purchase a home and when leaving the country permanently. In other words, the Fund provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes. Accordingly, in circumstances where the Fund permits the withdrawal of benefits for purposes not solely consistent with the fund being a 'superannuation fund', the Fund cannot be a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Taxation of funds as applicable fund earnings: As the Fund is not a 'foreign superannuation fund' and nor is the payment paid from a scheme for the payments of benefits 'in the nature of superannuation upon retirement or death', section 305-70 of the ITAA 1997 does not apply to any lump sum received by you from the Fund. Accordingly, no part of any such lump sum is applicable fund earnings for the purposes of section 305-70 of the ITAA 1997. | Detailed Reasoning - Assessable income from a payment by a foreign entity that is not a superannuation fund: The Fund is considered a foreign trust and the amount paid to you will be subject to tax under 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 a lump sum payment 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 reduces the amount to be included in assessable income under subsection 99B(1) by so much of that amount, relevantly for present purposes, as represents the 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. The term 'corpus' is not defined in the legislation; therefore, it takes the ordinary meaning of the term. The Macquarie Dictionary (Online edition 2019) defines 'corpus' to mean a 'principal or capital sum, as opposed to interest or income'. The amount that represents the corpus of the Fund includes any amounts previously deposited into the Fund by you and your employer. The lump sum may also include amounts that represent earnings of the Fund. Fund earnings are not taken to represent corpus, as the earnings are attributable to income derived by the 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: a) the proportion of any lump sum that represents amounts previously deposited to the Plan by you and your employer is excluded from your assessable income, and b) the proportion of any lump sum that represents earnings of the Plan (from the commencement date of the Plan) is included in your assessable income.