Private ruling: Foreign lump sums and applicable fund earnings
Date of advice: 19 December 2019
Published: February 2020
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the lump sum paid from the foreign retirement fund (the Foreign Fund)? | A1: Yes | Q2: Is any part of the lump sum payment received the taxpayer from a Foreign Fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997 | A2: Yes

Relevant facts and circumstances: The taxpayer holds an interest in a foreign fund (the Foreign Fund). The Foreign Fund is a retirement fund established and managed outside Australia. The trust deed of the Foreign Fund provides that the benefits of the fund can only be paid out to fund members under the following circumstances · the member retires or dies · the member can no longer work because they are permanently incapacitated Under the terms of a second fund (the Transfer Fund) which made transfers to the Foreign Fund benefits are payable to members at: · retirement; or · early retirement due to ill health; or · death; and · early withdrawals for non-retirement purposes are not permitted. The taxpayer became a resident of Australia for taxation purposes. The Transfer Fund made a transfer to the Foreign Fund after the taxpayer became a resident of Australia No further contributions or other transfers from any other foreign superannuation funds were made into the Foreign Fund for the benefit of the Taxpayer. Since the taxpayer became an Australian resident the taxpayer remained an Australia resident until the present time The rules of the Foreign Fund allows for a flexible drawdown of a member's interests The taxpayer received a payment from the Foreign fund in the 2018-19 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-95(2) | Income Tax Assessment Act 1997 Section 305-55 | Income Tax Assessment Act 1997 Section 305-70 | Income Tax Assessment Act 1997 Section 305-75 | Income Tax Assessment Act 1997 Section 307-65 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 Subsection 10(1) | Superannuation Industry (Supervision) Act 1993 Section 19 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: The Foreign Fund and the Transfer fund are foreign superannuation funds as per subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Lump sum payments received from certain foreign superannuation funds: Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation lump sum benefits paid from foreign superannuation funds and other foreign schemes for the payment of similar retirement or death benefits, as defined in section 305-55 of the ITAA 1997. Before determining whether an amount is assessable income under subdivision 305-B of the ITAA 1997, it is necessary to determine whether the payment is being made from a foreign superannuation fund . If the entity making the payment is not a foreign superannuation fund (or scheme for the payment of superannuation benefits), subdivision 305-B of the ITAA 1997 will not apply to the payment. | 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 superannuation fund is a foreign superannuation fund at a time or for an income year if the fund is not an Australian superannuation fund at that time or for that income year. 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: the fund was established in Australia, or any asset of the fund is situated in Australia; and at that time, the central management and control of the fund is ordinarily in Australia; and at that time, either the fund had no active members or at least 50% of: · the total market value of the fund's assets attributable to superannuation interests held by active members; or · 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. The three tests under subsection 295-95(2) must be satisfied at the same time. If a fund fails to satisfy one of the above tests at a particular time, it is not an Australian fund at that time. A superannuation fund that is established, managed or controlled outside of Australia or has all of its assets 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. Section 305-55 of the ITAA 1997 also provides for a lump sum benefit payment (that is not a pension payment) made from a foreign retirement scheme (that provides retirement benefits 'in the nature of superannuation') to receive the same tax treatment as a superannuation lump sum paid from a foreign superannuation fund. However, the conditions in subsection 305-55(2) of the ITAA 1997 must be met, including: · the scheme was not established in Australia and · the scheme is not centrally managed or controlled in Australia. | 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 defines a superannuation fund as: a fund that is: · an indefinitely continuing fund; and · a provident benefit, superannuation or retirement fund; or · a public sector superannuation scheme. | Detailed Reasoning - Meaning of 'provident, 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 stated 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'. Justice Kitto's judgment indicated that a fund is not a 'provident, benefit or superannuation fund' if there are provisions for paying benefits 'for any other reason whatsoever.' Although a fund may contain provisions for retirement purposes, it cannot be accepted as a superannuation fund if it contains provisions for benefits to be paid in circumstances other than the member's retirement. In the case of Baker v FC of T 2015 ATC 10-399; (2015) AATA 469, Justice O'Loughlin stated that: 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....Accordingly, for a payment to be a payment from a scheme for the payment of benefits in the nature of superannuation upon retirement the scheme would need to provide for payments that have the essential qualities, character or features of payments of superannuation benefits on retirement. Further, the scheme would need to be such that such payments were more than just possibilities among a range of alternatives such as simple withdrawals available at any time. In paragraph 62(1)(a) of the SISA, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member only when one of the following events occurs: on or after retirement from gainful employment attaining a prescribed retirement age the member dies (which may require the benefits to be passed on to the member's dependants or legal representative). The SISA and the Superannuation Industry (Supervision) Regulations 1994 (SISR) provide guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. This guidance is still relevant to understanding the purpose of foreign superannuation funds, even though the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA) that are established in Australia and operate in Australia. In view of the legislation and decisions made in the Scott and Baker cases, a fund can only be classified as a superannuation fund if it exclusively provides benefits for the purpose of payment upon the member's retirement, invalidity or death, or as otherwise specified under the SISA and SISR. A foreign retirement fund is not a superannuation fund for Australian income tax purposes if the fund allows for withdrawals for pre-retirement purposes, such as education, medical expenses or housing costs. In this case, the trust deed of the two funds provides that the benefits of the fund can only be paid out to beneficiaries under the following circumstances: · the member retires or dies · the member can no longer work because they are permanently incapacitated · retirement; or · early retirement due to ill health; or · death; and · early withdrawals for non-retirement purposes are not permitted. As the benefits in the funds are paid only for retirement purposes, the funds meets the 'sole purpose test' and therefore are superannuation funds for Australian income tax purposes. Therefore, a lump sum paid or transfer made from these funds are from a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997. Consequently, Subdivision 305-B of the ITAA 1997 does apply to any lump sum or transfers from these funds. | Detailed Reasoning - Flexible drawdown payment: As we have determined the Foreign Fund is a foreign superannuation fund we now have to determine if the payment is a superannuation lump sum. A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit pursuant to section 307-65 of the ITAA 1997. The terms 'superannuation income stream' and 'income stream are considered in Taxation Ruling TR 2013/5 Income tax: when a superannuation income stream commences and ceases at paragraphs 51 to 58. It states: | Detailed Reasoning - The meaning of 'superannuation income stream': 51. The meaning of 'superannuation income stream' is directly relevant to the meaning of 'superannuation income stream benefit'. Under Divisions 301 through to 307 of the ITAA 1997, certain income tax consequences apply to a member of a superannuation fund who receives a superannuation income stream benefit. There are also particular income tax consequences that apply to a superannuation fund that is paying a superannuation income stream. 52. A 'superannuation income stream' is defined in subsection 307-70(2) of the ITAA 1997 by reference to regulation 995-1.01 of the ITAR 1997 and relevantly to this Ruling as: (a) an income stream that is taken to be: ... (ii) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or ... 53. It is clear from this definition that the meaning of 'superannuation income stream' is concerned with something that is an 'income stream' within the ordinary meaning of that expression. 54. As the term 'superannuation income stream benefit' is separately defined, the term 'superannuation income stream' refers to the particular arrangement or product with the features as specified by the fund's governing rules, the agreement between the fund and the member and any other relevant documentation that, relevantly for this Ruling, is an account based pension of the kind covered by subregulation 1.06(1) of the SISR 1994. The term 'superannuation income stream' does not refer to each particular payment made from the arrangement or product. | Detailed Reasoning - The meaning of 'income stream': 55. The term 'income stream' is not defined for the purposes of the ITAA 1997 and hence takes its ordinary meaning in the context in which it appears. 56. There is no dictionary meaning of the composite term 'income stream'. However, one of several meanings given for 'income' by the Macquarie Dictionary is: the returns that come in periodically, especially annually, from one's work, property, business, etc; revenue; receipts 57. One of several meanings given for 'stream' is: a continuous flow or succession of anything: a stream of words. 58. In light of the ordinary meanings of these terms, the Commissioner considers the ordinary meaning of the phrase 'income stream' refers to a series of periodic (including a series of annual) payments made from a member's interest in the superannuation fund. The payments that comprise the income stream must relate to each other such that it is possible to identify a series of payments to be made to the member over an identifiable period of time. The payments need not be periodic in the sense that they are always paid at the same, recurring intervals. The payments in a series may also vary in amount. However, a liability to make a single payment for one year will not satisfy as a liability to pay a member a series of payments and thus will not satisfy as an income stream. The facts show the Taxpayer took a single one-off payment from the Foreign Fund. The payment was not the first in a series of periodic payments to be made over an identifiable period of time that relate to each other. At this point in time a future payment will only be made after the Taxpayer makes a new request. For this reason the Commissioner does not consider this payment to be a part of an 'income stream' or 'superannuation income stream' and is therefore a lump sum payment pursuant to section 307-65 of the ITAA 1997. The payment should therefore be taxed under section 305-70 of the ITAA 1997. | Summary: There is an amount of applicable fund earnings under section 305-70 of the ITAA 1997 as based on the formula in that section. | Detailed Reasoning - Applicable fund earnings: If an individual taxpayer receives a superannuation lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, section 305-70 of the ITAA 1997 includes in the individual's assessable income an amount determined by a formula. This amount is referred to as the applicable fund earnings . The formula allows a method of calculating an amount to be included in a taxpayer's assessable income that is broadly meant to be representative of the amount of earnings in the foreign fund while a taxpayer is a resident of Australia. However, it should be noted the formula does not calculate the amount of actual earnings or growth. If the lump sum is paid directly to the individual taxpayer, the applicable fund earnings amount is taxed at the individual taxpayer's marginal tax rate. Only the applicable fund earnings amount is assessable income. The remainder of the lump sum payment is not assessable income and is tax-free. Therefore, the Taxpayer is required to include the assessable income from applicable fund earnings in their personal income tax return for the 2018-19 income year. Where a lump sum payment is made from one foreign superannuation to another foreign superannuation fund no part of the payment is assessable income. However, the applicable fund earnings of a later lump sum payment out of the other foreign superannuation fund may include an amount of previously exempt fund earnings attributable to the lump sum payment. | Detailed Reasoning - Applicable fund earnings amount - Calculation: The applicable fund earnings are worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the individual was an Australian resident at all times during the period to which the superannuation lump sum relates. It states: If you were an Australian resident at all times during the period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows: (a) work out the total of the following amounts: (i) the part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day ); (ii) the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other * foreign superannuation fund during the period; (b) subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for * foreign income tax ); (c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6). Subsection 305-75(3) of the ITAA 1997 applies where the individual was not an Australian resident at all times during the period to which the superannuation lump sum relates. If the individual taxpayer became a member of the foreign superannuation fund before they became a resident of Australia, the amount applicable fund earnings is calculated under subsection 305-75(3) of the ITAA 1997, which states: If you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows: Work out the total of the following amounts: · the amount in the fund that was vested in you just before the day (the start day ) you first became an Australian resident during the period · the part of the payment that is attributable to contributions to the fund made by (or in respect of) you during the remainder of the period · the part of the payment (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during that period. Subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax). Multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident. Add the total of all previously exempt fund earnings (if any) covered by subsections 305-75(5) and 305-75(6). | Detailed Reasoning - Calculation of your applicable fund earnings: Firstly we need to calculate any previously exempt fund earnings in relation to the transfer from the Transfer Fund to the Foreign Fund. These are amounts which would have been included in the taxpayer's assessable income had the amounts not been transferred to another foreign superannuation fund. As the Taxpayer was a member of the Transfer Fund before becoming an Australian resident the amount of previously exempt fund earnings is calculated in accordance with the formula in subsection 305-75(3) of the ITAA 1997. | Detailed Reasoning - A: The amount in the fund vested in the Taxpayer just before they became a resident 305-75(3)(a)(i) | Detailed Reasoning - B: The part of the payment attributable to contributions made after the Taxpayer became a resident 305-75(3)(a)(ii) | Detailed Reasoning - C: The part of the payment attributable to amounts transferred from any other foreign superannuation fund 305-75(3)(a)(iii) | Detailed Reasoning - E: The amount in the fund vested in the Taxpayer when the lump sum was paid | Detailed Reasoning - E - D: 305-75(3)(b) | Detailed Reasoning - G: Proportion of residency days | Detailed Reasoning - I: F x G + H = Applicable Fund Earnings Since the Transfer Fund and the Foreign Fund are both foreign superannuation funds, these amounts are not assessable as per subsection 305-70(4) of the ITAA 1997. However they will be classified as previously exempt fund earnings and hence included in the applicable fund earning calculations for the payment from the Foreign Fund to the Taxpayer in the 2018-19 financial year. The table below shows the calculation of the Taxpayer's applicable fund earnings for the lump sum received from the Foreign Fund in accordance with subsection 305-75(2) of the ITAA 1997. | Detailed Reasoning - A: Part of the lump sum attributable to contributions into the Foreign Fund - 305-75(2)(a)(i) | Detailed Reasoning - B: Part of the lump sum attributable to amounts transferred from other foreign funds - 305-75(2)(a)(ii) | Detailed Reasoning - D: Amount in the Foreign Fund vested in the Taxpayer when the lump sum was paid | Detailed Reasoning - D - C: 305-75(2)(b) | Detailed Reasoning - F: Previously exempt fund earnings (if any) | Detailed Reasoning - G: Applicable fund earnings = E + F (zero if negative) - 305-75(2)(c) Therefore there is an amount of applicable fund earnings to include in the Taxpayer's assessable income in the 2018-19 financial year. The formula to calculate the amount of applicable fund earnings does not calculate the actual growth or earnings in the foreign fund. Rather it calculates an amount that must be included in a taxpayer's assessable income. There is nothing in the legislation which allows for an alternative calculation or some other amount to be assessed.