Private ruling: Lump sum payments from foreign superannuation funds
Date of advice: 8 March 2021
Published: May 2021
Ruling period: Income year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the US Fund a foreign superannuation fund according to the definitions in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will any part of the payment withdrawn from the taxpayer's US Fund be included in his assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes | Q3: Will the taxpayer also be liable for section102AAM of ITAA 1936 interest payable on the section 99B amounts paid to, or applied for the benefit of him, after he became an Australian resident on 1 July 2009? | A3: Yes

Relevant facts and circumstances: The Taxpayer became an Australian resident after leaving USA While living in the USA, the Taxpayer became a member of the US Fund. The US Fund is a complying 401K scheme which was established and is administered in the USA. Relevantly, the US Fund's policy document contains the following withdrawal conditions: Loans Loans can be taken for any reason, and you can borrow as little as $1,000 or as much as $50,000 minus the highest outstanding loan balance in the last 12 months or 50% of your vested account balance, whichever is less. Hardship Withdrawal Generally, withdrawals are not permitted prior to reaching age 59 ½ i=unless you meet certain financial hardship withdrawal guidelines. Withdrawals are subject to income taxes and may be subject to an early distribution tax as well A hardship withdrawal can only be made for one or more of the following reasons: • Purchase of your primary residence • To prevent foreclosure on the mortgage of your principal residence • To pay un-reimbursed medical expenses for you, your spouse or dependents • Payment of college tuition and related expenses for you, your spouse or dependent children • Funeral expenses for immediate family members The Taxpayer intends to commence withdrawals in 2018-19 income year. The Taxpayer has resided and worked in Australia for a number of years. Taxpayer was originally a US citizen but has been a resident of Australia for taxation purposes for many years. Taxpayer retired in 201X. Taxpayer is receiving a US social security pension and pension payments from their employer's pension plan, the US fund, and is aware that both of these are taxable in Australia. In addition to the above the taxpayer has received a lump sum payment from the US Fund Plan.

Relevant legislative provisions: 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 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 subsection 295-95(2) | Income Tax Assessment Act 1997 subdivision 305-B | Income Tax Assessment Act 1997 section 305-60 | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75 | Income Tax Assessment Act 1997 section 305-80 | Income Tax Assessment Act 1997 section 307-15 | Income Tax Assessment Act 1997 section 960-50 | 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 ATO view document | ATO ID 2011/93

Reasons for decision: Detailed Reasoning - Lump sum payments from foreign superannuation funds: Subdivision 305-B of the ITAA 1997 deals with the tax treatment of superannuation benefits paid from certain foreign superannuation funds. In accordance with section 305-60 of the ITAA 1997, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income. If a person received 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 ITAA 1997 applies to include the applicable fund earnings (if any) in the person's assessable income. | 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 if not an Australian superannuation fund at the 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 an ' Australian superannuation fund'as follows: A superannuation fund is an Australian superannuation fund at a time, and for an 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 Australian; and... Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would not qualify as an Australian superannuation fund and would therefore be a 'foreign superannuation fund' in accordance with subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Meaning of 'superannuation fund': Subsection 995-1(1) of the ITAA 1997 defines a 'superannuation fund ' as having the same meaning given by section 10 of the 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. 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) 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 benefits of its employees except that it must be 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 Mahoney v Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 ( Mahoney ). 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 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 that 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 ) 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 Mahoney , 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 as specified under the SISA. The information provided indicates that the Taxpayer could access their benefits in the US Fund for pre-retirement purposes. For example, a member may withdraw their after-tax contributions from their account at any time, for any reason. It is considered that the US Fund does not ultimately provide the narrow range of benefits required by the definition of a superannuation fund. Further, as the benefits in the US Fund can be access for pre-retirement purposes, the US Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for the purposes of subsection 10(1) of the SISA. Therefore, on the basis of the information provided, any payments made from the US Fund will not be considered to be paid from a 'foreign superannuation fund' as defined in subsection 995 - 1(1) of the ITAA 1997. | Detailed Reasoning - Assessability of a foreign pension fund payout: It has been determined previously that the fund is not a superannuation fund for the purposes of the ITAA 1997. Therefore, as an Australian resident, the Taxpayer will be subject to the general tax rules applicable to their circumstances, in this case the general tax rules relating to trust income. | 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, a person's 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 sections 97 and 99B of the ITAA1936. Section 97 of the ITAA 1936 includes in a person's assessable income distributions of income made by a trust to the person as a beneficiary. 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 (1) is not to include any amount that represents either: • the corpus of the 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 included in the beneficiary's income 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). | Detailed Reasoning - Income derived while beneficiary was a non-resident: ATO ID 2011/93 considers the tax implications when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income. It states that: The trust property paid to the resident beneficiary is attributable to foreign source interest derived by the trust. As interest income would have been assessable had it been derived by a resident taxpayer, and as the interest income has not been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, none of the exclusions in subsection 99B(2) of the ITAA 1936 applies to reduce the amount included in the assessable income of the beneficiary. A question arises however whether the non-resident status of the beneficiary for the period in which the interest was derived by the trust estate in any way alters the outcome under the provision. It is clear from the language of section 99B of the ITAA 1936, that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust. Rather, the only explicit condition concerning residency is that the beneficiary be a resident at some time during the year of income in which the trust property is paid to them or applied for their benefit. | Detailed Reasoning - Application to circumstances: In this case, the Taxpayer has made withdrawals from the US Fund in the 2018-19 income year totalling US$xx. The US Fund was holding and investing contributions for the Taxpayer's benefit; we therefore consider it took on the form of a trust. Any part of the withdrawal that represents amounts deposited by the Taxpayer or their employer will not be included in the Taxpayer's assessable income in accordance with subsection 99B(2) of the ITAA 1936. These amounts are considered the corpus of the trust. In this case, the Taxpayer's personal contributions were US$xx and the employer contributions were US$xx. The remaining US$xx is the earnings on the corpus of the trust. Any part of the withdrawal that represents income derived by the US Fund on the corpus of the trust during the financial year the withdrawal is made will be included in the Taxpayer's assessable income under section 97 of the ITAA 1936. Any part of the withdrawal that represents earnings on the corpus of the trust prior to the period listed above will be assessed under subsection 99B(1) of the ITAA 1936. However, ATO ID 2011/93 clearly states that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust. Therefore, you will be assessable in the income year of the ruling on US$xx being the earnings on the corpus of the trust. | Detailed Reasoning - Interest charge on distributions of accumulated trust income: An Australian resident may be liable to interest under the Taxation (Interest on Non-resident Trust Distributions) Act 1990 , where their assessable income includes an amount from non-resident trust assessed under section 99B of the ITAA 1936. Subsection 102AAM(1) of the ITAA 1936 may make a taxpayer liable to pay interest to the Commissioner, on distributions from certain non-resident trust estates. The interest is calculated on the following amount: (distributed amount × applicable rate of tax) - FTC. • "Distributed amount" is the amount included in assessable income of the taxpayer under section 99B of the ITAA 1936 and grossed up by any foreign tax in respect of the distribution. • "Applicable rate of tax" is maximum rate of tax payable by the taxpayer. • "FTC" is the foreign tax credit which is attributable to the amount of the distribution included in the taxpayer's assessable income. The rate of interest is the GIC rate fixed under Section 8AAD of the Taxation Administration Act 1953 less seven percentage points. For information on current GIC rates applicable to your circumstances go to ato.gov.au and enter Quick Code QC 16145 in search.