Private ruling: Lump sum from foreign superannuation fund
Published: June 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will any part of a proposed withdrawal from a foreign superannuation fund be included in your client's assessable income as 'applicable fund earning' under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will any part of a proposed withdrawal from a foreign fund be included in your client's assessable income as 'applicable fund earning' under any other provision of the ITAA 1997 or Income Tax Assessment Act 1936 ? | A2: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 305-75. | Income Tax Assessment Act 1997 Subsection 305-75(2). | Income Tax Assessment Act 1997 Subsection 305-75(3). | Income Tax Assessment Act 1997 Subsection 995-1(1). | Income Tax Assessment Act 1997 Subsection 292-85(2) | Income Tax Assessment Act 1997 Subsection 292-95(2) | Income Tax Assessment Act 1997 Section 292-410 | Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 4 | Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 5 | Income Tax (Transitional Provisions) Act 1997 ) Subsection 292-20(2) | 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 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 6-10(4) | Income Tax Assessment Act 1997 Subsection 6-10(2) | Income Tax Assessment Act 1936 Section 23AK | 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 481(1)

Reasons for decision: Summary: The Foreign Fund 2 is not a foreign superannuation fund. Hence, the provisions relating to 'applicable fund earnings' has no application. The Foreign Fund 2 is a trust set up overseas, therefore it is neither an Australian trust or a resident Part IX entity. Since your client is an Australian resident, who would make a withdrawal from a foreign trust, the amounts withdrawn from Foreign Fund 2 are similar to distributions from a trust and would be assessable as an amount paid to, or applied for the benefit of, a beneficiary of a trust. As the foreign investment fund (FIF) measures apply, the net withdrawal amount is reduced by any FIF income previously attributed. | Detailed Reasoning - Lump sum payments from foreign superannuation funds:: Where a person receives a lump sum payment from a foreign superannuation fund more than six months after the person became a resident of Australia, section 305-70 of the Income Tax Assessment Act 1997 (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 (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. | Detailed Reasoning - 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. 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 funds 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. Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), 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; | Detailed Reasoning - 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 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 SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the following events occur: (a) on or after retirement from gainful employment; or (b) attaining a prescribed age; and (c) 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 SIS Act 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 et cetera. Notwithstanding the SIS Act applies only to 'regulated superannuation funds', as defined in section 19 of the SIS Act, and foreign superannuation funds do not qualify as regulated superannuation funds, as they are established and operate outside Australia, the Commissioner views the SIS Act (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 SIS Act. Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund: (a) can also be used as a savings plan for non-retirement purposes; and/or (b) contains provisions for pre-retirement withdrawals for general non-retirement purposes such as housing, education and medical expenses et cetera. It is noted that neither Foreign Fund 1 or Foreign Fund 2 qualify as Australian superannuation funds, as they were established and operated outside Australia, and that the SIS legislation applies only to Australian superannuation funds, as defined in section 19 of the SIS Act. Nevertheless, the Commissioner views the SIS legislation as providing guidance as to what benefit or specific future purpose a superannuation fund should provide. You stated that your client's benefits from both Foreign Fund 1 and Foreign Fund 2 can be withdrawn at any time. In other words, both of your client's foreign funds provide for the payment of benefits 'for any other reason whatsoever' and not solely (that is, exclusively) for retirement purposes. Accordingly, both Foreign Fund 1 and Foreign Fund 2 do 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. | Detailed Reasoning - Limits on concessional contributions: Your client intends to withdraw the benefits from Foreign Fund 2 as a lump sum and then move them into an Australian Superannuation Fund. Concessional contributions are contributions made in respect of a person in the financial year to a complying superannuation plan and included in the assessable income of the superannuation provider. Concessional contributions include employer contributions, salary sacrifice contributions and personal contributions claimed as a tax deduction by a self-employed person. Concessional contributions made to superannuation funds are subject to an annual cap. The concessional contributions cap will be indexed to upward movements of average weekly ordinary time earnings (AWOTE) in $5,000 increments (subsection 292-20(2) of the ITAA 1997). For the 2010-12 income year the annual cap is $25,000. A person will be taxed on concessional contributions over the $25,000 cap at a rate of 31.5% (subsection 292-15 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2006). Between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply. In the 2010-11 income year, the annual cap will be $50,000 for people aged 50 or over. If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap (subsection 292-20(2) of the Income Tax (Transitional Provisions) Act 1997). If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap. Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap. Under paragraph 292-25(2)(c) of the ITAA 1997 the following amounts are excluded from being concessional contributions: · so much of an amount that is transferred to a superannuation fund from a foreign superannuation fund and is included in the assessable income of the fund as a result of a choice made under section 305-80; · an amount that is a roll-over superannuation benefit to the extent that it contains an untaxed element that is not an excess untaxed roll-over amount; · a contribution made to a constitutionally protected fund (CPF). | Detailed Reasoning - Limits on non-concessional contributions: Non-concessional contributions include: · personal contributions for which an income tax deduction is not claimed; · contributions a persons spouse makes to their superannuation fund account (spouse contributions); and · transfers of superannuation benefits from foreign superannuation funds (excluding amounts included in the funds assessable income). Non-concessional contributions made to a complying superannuation fund will be subject to an annual cap (subsection 292-85(2) of the ITAA 1997). For the 2010-12 income year the annual cap is $150,000. A person will be taxed on non-concessional contributions over the cap at the rate of 46.5% (subsection 292-80 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Non-concessional Contributions Tax) Act 2006). The person will be required to ask their superannuation fund to release an amount that is equal to the tax liability (section 292-410 of the ITAA 1997). | Detailed Reasoning - Ordinary income: The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the ITAA 1997). The withdrawal from your client's Foreign Fund account would not be ordinary income (subsection 6-5(2) of the ITAA 1997). 'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with receipt of trust income not previously subject to tax. 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, that 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: (a) corpus of the trust, but an amount will not be taken to represent corpus 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; or (b) amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; (c) amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A; or (d) and amounts included in assessable income under section 102AAZD of the ITAA 1936 (that is, amount included under the transferral trust measures for taxpayer having transferred property or services). Foreign Fund 2 is a trust set up in overseas country therefore it is not an Australian trust or a resident Part IX entity (subsection 481(1) of the ITAA 1936). Since your client is an Australian resident, who would make a withdrawal from a foreign trust, the amounts withdrawn from Foreign Fund 2 are similar to distributions from a trust and would be assessable under subsection 99B(1) of the ITAA 1936. However, the amount assessable under subsection 99B(1) of the ITAA 1936 does not include amount listed under subsection 99B(2). Only the income accumulated in Foreign Fund 2 and paid to your client as a resident taxpayer that is normally taxable in Australia and had not been previously subjected to tax in Australia would be assessable to your client under subsection 99B(1) of the ITAA 1936. Amounts assessable under subsection 99B(1) of the ITAA 1936 form part of your client's assessable income under subsection 6-10(4) of the ITAA 1997. The net withdrawal amount is then reduced by any foreign investment fund (FIF) income previously attributed in accordance with section 23AK of the ITAA 1936. Section 23AK of the ITAA 1936 treats certain amounts as non-assessable non-exempt income where the amounts were previously attributed to taxpayer under the FIF measures. The effect of treating an amount as non-assessable non-exempt income is that it is not assessable and is also treated as not being exempt income for all purposes of the Act subject to the exception in subsection 23AK(2). In order to be able to utilise the provisions contained in section 23AK of the ITAA 1936, your client will need to have maintained attribution accounts. FIF attribution accounts record the income attributed or distributed to your client from each of your client's interests in a FIF or foreign life policy (FLP). They allow your client to claim exemptions for FIF income previously attributed to your client, for example where, after being subject to FIF taxation under the FIF measures, your client later: · receive a distribution of income or gains from a FIF or FLP (section 23AK of the ITAA 1936) · dispose of the interest in a FIF or FLP (section 613 of the ITAA 1936), or · use a FIF loss to reduce assessable income (sections 532 and 533 of the ITAA 1936). Attribution accounts operate on the basis of credits and debits. In the FIF measures, a credit is referred to as a FIF attribution credit and a debit is referred to as a FIF attribution debit. Your client's FIF will have a FIF attribution credit recorded in its attribution account if an amount of FIF income is included in your assessable income under the FIF measures under section 529 of the ITAA 1936. The amount of FIF attribution credit is equal to the amount included in your client's assessable income or the amount of the FIF attribution debit, which arises for the FIF attribution account entity making the distribution (subsection 605(2) of the ITAA 1936). Your client will record a FIF attribution debit when the FIF in which your client has an interest makes a distribution to your client. Debits trace the movements of profits included in your client's assessable income under the FIF measures and prevent that income, where it has been attributed to your client, from being taxed again. A FIF attribution account will have a FIF attribution surplus where the total FIF attribution credits exceed the total FIF attribution debits. This will occur where the total amount of FIF income included in the assessable income exceeds the total amount of distributions received. If the FIF attribution account is in surplus when funds are withdrawn, the withdrawal amount will be reduced by that surplus. Only the excess of the amount withdrawn over the FIF attribution surplus will be considered to be an assessable distribution under section 99B(1) of the ITAA 1936.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: 1. Your client was born in Australia and moved overseas a number of years ago. | 2. Your client married an overseas resident. | 3. Your client was a member of a foreign fund (Foreign Fund 1). | 4. You advised that your client can withdraw benefits at any time from Foreign Fund 1. | 5. Your client's spouse passed away a number of years ago. | 6. Your client was the sole beneficiary of the late spouse's pension plan (the pension plan) which was a defined benefits pension plan overseas. | 7. Under the general rules of the pension plan, benefits from the pension plan cannot be converted to Foreign Fund 1 except on death. | 8. In the relevant income year, your client transferred the proceeds from the pension plan into Foreign Fund 1. | 9. The majority of the benefits in the Foreign Fund 1 were funded by the transfer-in of your client's spouse's pension plan in the relevant income year and a small portion came from voluntary contributions that both your client and the spouse made to Foreign Fund 1. | 11. In the subsequent income year, your client and your client's children moved back to Australia to take up permanent residency. | 12. In the subsequent income year, your client transferred them benefits from Foreign Fund 1 to another overseas fund (Foreign Fund 2). | 13. You advised that your client can withdraw benefits at any time from Foreign Fund 2. | 14. Under the rules of Foreign Fund 2, your client is required to withdraw a minimum pension amount from that fund every year, however more can be drawn if needed. | 15. Tax of a certain percentage is withheld in overseas on withdrawals as part of the overseas/Australian double tax treaty. | 16. The tax rate of a certain percentage also applies to lump sum withdrawals from Foreign Fund 2. Your client is not required to lodge an overseas tax return since becoming an Australian resident for tax purposes. | 18. Your client intends to move the monies from Foreign Fund 2 into an Australian superannuation fund. However, under the rules of Foreign Fund 2, your client is unable to directly transfer the benefits from that fund to an Australian superannuation fund. The benefits in Foreign Fund 2 can only be transferred to an account in your client's name. | 19. Your client wishes to withdraw funds from Foreign Fund 2 as a lump sum and then move them into an Australian superannuation fund.