Private ruling: Lump sum payment from a foreign superannuation fund
Date of advice: 22 August 2017
Published: December 2017
Ruling period: Income year ended 30 June 201Y
Date scheme commenced: 1 July 201X

Ruling: Q1: Is any part of the lump sum payment received by the Taxpayer from a Foreign Retirement Savings Plan, assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is any part of the lump sum payment from the Foreign Retirement Savings Plan included in the Taxpayer’s assessable income? | A2: Yes

Relevant facts and circumstances: The Taxpayer held an interest in a Retirement Savings Plan in a foreign country (the Foreign Plan). The Taxpayer has been an Australian Resident for a number of years. The Taxpayer’s employment was terminated in 201X and they were over 55 years of age. In late 201X, the Foreign Plan made a lump sum payment to the Taxpayer’s nominated bank account. The Taxpayer supplied a document setting out details on withdrawals from the Foreign Plan. Withdrawals can be made from the Foreign Plan upon leaving the company and in times of financial hardship including for tuition expenses and the purchase of a principal residence.

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 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) | Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 paragraph 99B(2)(a) | Income Tax Assessment Act 1936 subsection 481(3) Question 1 | Summary | The Foreign Plan does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) will not have any application in this instance. 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 the person becomes a resident of Australia, section 305-70 of the ITAA 1997 will operate to include the applicable fund earnings in the person’s assessable income. | The applicable fund earnings are the amount worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. | However, before determining whether an amount is assessable under subsection 305-70(2) of the ITAA 1997, 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 subsection 305-70(2) will not have any application. | 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. | 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 Foreign Plan also allows for withdrawals prior to retirement when the individual leaves the company and in times of financial hardship, for the payment of tuition fees and the purchase of a principal residence. | Because the benefits in the Foreign Plan can be withdrawn for purposes other than retirement, the Foreign Plan does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes. | Accordingly, the Foreign Plan does not fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will not have any application in this instance. | Question 2 | Summary | The Foreign Plan is a foreign trust as defined in subsection 481(3) of the Income Tax Assessment Act 1936 (ITAA 1936) and is therefore a foreign investment fund (FIF). Detailed Reasoning | A foreign trust is defined in subsection 481(3) of the ITAA 1936 as a trust which is not an Australian trust, and which did not result from a will or an intestacy in relation to the estate of a deceased person. | The Taxpayer held an interest in the Foreign Plan. | This Foreign Plan is set up for the exclusive benefit of the Taxpayer or their beneficiaries. | The Foreign Plan is a foreign trust as defined in subsection 481(3) of the ITAA 1936 and is therefore a foreign investment fund (FIF). The Foreign Plan is not a superannuation fund for the purposes of the ITAA 1997 and the ITAA 1936 as it allows for withdrawals for pre-retirement purposes. Therefore the Foreign Plan is not established solely for the provision of retirement benefits. | Repeal of FIF measures | On 14 July 2010, the FIF measures were repealed and do not apply from the 2010-11 income year onwards. | If the Taxpayer has an interest in a FIF, they will be subject to the general tax rules applicable to their circumstances – for example, the general tax rules relating to trust income. | 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, their 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 section 99B of the ITAA 1936. | 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 beneficiaries 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). | In the Taxpayer’s case, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from the Foreign Plan which represent the growth in the fund are assessable under subsection 99B(1) of the ITAA 1936 in Australia. | General taxation advice | 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 the 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. There will be no opportunity to carry them forward for use against future Australian tax on foreign income. | 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.