Private ruling: Lump sum payment from a foreign superannuation fund
Date of advice: 15 November 2017
Published: April 2018
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the retirement product established in X a ‘foreign superannuation scheme’ under Subsection 995-1(1) of the Income Tax Assessment Act (ITAA) 1997? | A1: No | Q2: Will any part of a lump sum payment paid to you from the foreign retirement plan be included in your assessable income under section 99B of the Income Tax Assessment Act (ITAA) 1936? | A2: Yes | Q3: Will you be entitled to a foreign income tax offset in respect of any foreign tax withheld on funds withdrawn from the foreign retirement plan or otherwise paid to the foreign tax authorities? | A3: Yes

Relevant facts and circumstances: The Taxpayer became an Australian resident for taxation purposes on the Residency Date. Information on the overseas pension scheme’s website states that members at any age with less than two years of service are permitted to receive a return of contributions plus interest. Also a member with two or more years of service can receive the value of their contributions plus those of their employer along with investment returns on both contributions. There were no contributions or pension amalgamations to the overseas pension scheme while the Taxpayer was a resident of Australia. The Taxpayer transferred the entirety of their benefits in the overseas pension fund to their Australian bank account. The value of the Taxpayer’s benefits on the Residency Date in the overseas pension scheme was provided. The Taxpayer provided information from the overseas pension fund of the cheque amount sent and the amount of the gross amount and amount of tax withheld. The Taxpayer provided information from the overseas pension fund advising the amount of the non-locked funds. The Taxpayer was unable to provide information from the overseas pension fund confirming the total transferred amount in Australia. The Taxpayer was unable to provide evidence of the cheque being deposited into their Australian bank account. The Taxpayer advised that the benefit amount was not paid into another super fund before being deposited into their Australian bank account.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 995 - 1(1) | Income Tax Assessment Act 1997 subsection 295-95 | Superannuation Industry (Supervision) Act 1993 section 10 | Superannuation Industry (Supervision) Act 1993 section 19 | Superannuation Industry (Supervision) Act 1993 section 62 | 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 1936 subsection 99B(2)(a) | Income Tax Assessment Act 1997 section 770-10 Relevant case law | Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290 Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232 | Summary | The overseas pension scheme is not a foreign superannuation fund as defined under Subsection 995-1(1) of the ITAA 1997. | Detailed reasoning | Foreign Superannuation Fund | Under subsection 995-1(1) of the ITAA 1997 a foreign superannuation fund is defined as: | (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 995-1(1) of the ITAA 1997 also defines an Australian superannuation fund as having the meaning given by section 295-95 of the ITAA 1997, that is basically, a fund that was established in Australia and its central management and majority of active members are located in Australia. | Subsection 995-1(1) of the ITAA 1997 also 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 (emphasis added). | 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 be exclusively 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 upon events such as the following: | ● on or after retirement from gainful employment; or | ● 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). | 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. | Notwithstanding that the SISA only applies 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 operated outside of 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. | Non-Locked Funds | The overseas pension scheme’s funds are non-locked and can be transferred to a non-locked Registered Retirement Savings Plan (RRSP) or taken as a taxable cash refund. | Fund rules for the overseas pension scheme provide that a member at any age, who has less than two years of service, can receive a refund of their contributions plus interest. Also a member with two or more years of service can receive the value of their contributions plus those of their employer along with investment returns on both contributions. | The non-locked funds in the overseas pension scheme are in contrast to the funds in a locked-in RRSP where funds are ‘locked-in’ and can only be used to accumulate retirement income. Ordinarily, the funds cannot be paid out in cash, but instead must be used to provide income when the plan member retires. Similar to an Australian superannuation fund, there are instances where a member can gain ‘special access’ to their funds prior to retirement age. These would be instances such as: | ● Terminating gainful employment | ● Permanent incapacity | ● Temporary incapacity | ● Severe financial hardship | ● Compassionate grounds | ● Terminal medical condition | Therefore an non-locked fund which allows early access for reasons not similar to these instances would not be recognised as a foreign superannuation fund. | Based on the above, the Public Service Pension Plan, being a non-locked fund, would not meet the definition of a superannuation fund, as funds are obtainable in circumstances other than once the member reaches retirement age, and early or special access provisions do not mirror those of Australian legislation. The Public Service Pension Plan does not meet the Commissioner’s view that the fund must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. | Receipt of foreign lump sum | A fund in the nature of a retirement fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder. | Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary. | However, subsection 99B(2) of the ITAA 1936 operates to exclude certain amounts from the assessable income of the beneficiary. | Specifically, paragraph 99B(2)(a) of the ITAA 1936 provides that assessable income will not include the corpus (capital) of the trust - but not an amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer. | In this case, the conditions in subsection 99B(1) of the ITAA 1936 will be satisfied as the Taxpayer will receive an amount of trust property during an income year in which they are a resident. | However, the receipt of an amount that represents amounts previously deposited to the Fund by or on the Taxpayer’s behalf, would come within paragraph 99B(2)(a) of the ITAA 1936; that is, the amount would be considered to represent the corpus of the trust. | Distributions, to the extent that they come within subsection 99B(2) of the ITAA 1936, are excluded from amounts assessable under subsection 99B(1) of the ITAA 1936. | Only the income accumulated in the Fund paid to the Taxpayer as a resident taxpayer that is normally taxable in Australia and had not previously been subject to tax in Australia will be included in their assessable income. | Therefore, it is the gross amount you will receive converted to Australian dollars, less the amount that represents deposits to the fund converted to Australian dollars, that will be the amount assessable under subsection 99B(1) of the ITAA 1936. | Foreign income tax offset | Section 770-10 of the ITAA 1997 provides that a taxpayer is entitled to claim a foreign income tax offset for foreign income tax paid in respect of an amount that is included in their assessable income. | Section 770-15 of the ITAA 1997 specifies that foreign income tax means tax that is imposed under a law other than an Australian law and is: | ● tax on income | ● tax on profits or gains, whether of an income or capital nature, or | ● any other tax that is subject to an agreement covered by the International Tax Agreements Act 1953 (Agreements Act). A taxpayer is deemed to have paid the foreign income tax if the foreign tax has been withheld from the income at its source (section 770-130 of the ITAA 1997). | In considering the entitlement to a foreign tax credit for X tax paid, it is necessary to consider not only Australia’s domestic income tax law but also the X Convention contained in the Agreements Act. Article 23(1)(a) of the X Convention provides that Australia will allow a credit for X tax, on income derived by a resident of Australia from sources in X. | Therefore, the Taxpayer is entitled to claim a foreign income tax offset for any X income tax paid in respect of amounts included in their assessable income in their Australian tax return. This means that if amounts are excluded from the Taxpayer’s assessable income as per s 99B(2) above, then the foreign income tax offset will need to be apportioned accordingly.