Private ruling: foreign lump sum transfer
Published: February 2015
Ruling period: Income year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Is any part of a lump sum payment received from an Individual Retirement Account (IRA) assessable as applicable fund earnings as worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? 2. Is any part of the lump sum payment from the IRA to be included in your assessable income under either section 6-5 or section 6-10 of the ITAA 1997? | A1: 1. No. 2. Yes.

Relevant facts and circumstances: You became a resident of Australia a number of years ago. While living overseas, you became a member of a foreign pension fund (the Fund). The Fund is established in the USA. As well as providing benefits on termination or retirement, provided certain withdrawal conditions are met, the Fund also provides benefits to: • pay higher educational expenses for the member and their spouse, children or grandchildren; • pay expenses related to the purchase of the member's first home; and • pay medical costs for the treatment of critical illnesses faced by the member or their close family members. You have paid tax in the foreign country on contributions you have made to the Fund. You intend to transfer a lump sum benefit from the Fund to a self-managed superannuation fund in Australia.

Relevant legislative provisions: 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 Paragraph 99B(2)(a) | Income Tax Assessment Act 1936 Former section 515 | Income Tax Assessment Act 1936 Former paragraph 603(1)(f) | Income Tax Assessment Act 1936 Former section 606 | 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 Subdivision 305-B | Income Tax Assessment Act 1997 Section 305--55 | Income Tax Assessment Act 1997 Section 305-60 | Income Tax Assessment Act 1997 Section 305-65 | 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) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Subsection 10(1) | Superannuation Industry (Supervision) Act 1993 Section 19 | Superannuation Industry (Supervision) Act 1993 Section 62 | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Section 5(1)

Reasons for decision: Summary: A lump sum payment from the Fund is not a superannuation benefit from a 'foreign superannuation fund', therefore Subdivision 305-B of the ITAA 1997 has no application in this case. A lump sum payment received from the Fund will be treated as a receipt (distribution) of trust income not previously subject to tax and will be assessed in accordance with section 99B of the Income Tax Assessment Act 1936 (ITAA 1936). An amount of the lump sum that represents amounts contributed to the Fund by you and your employer would come within paragraph 99B(2)(a) of the ITAA 1936. Distributions, to the extent that they come within subsection 99B(2) of the ITAA 1936, would be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936. An amount of the lump sum that represents income accumulated in the Fund (paid to you as a resident taxpayer) that is normally taxable in Australia and had not previously been subjected to tax in Australia would be assessable under subsection 99B(1) of the ITAA 1936. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds. Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death. Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax-free. It is not assessable income and is not exempt income (sections 305-60 and 305-65 of the ITAA 1997). Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 applies to include any applicable fund earnings in assessable income. Before determining whether an amount is exempt under sections 305-60, or 305-65 of the ITAA 1997, or assessable under section 305-70 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 subdivision 305-B will not apply. | 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 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 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. | 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 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. 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. | Detailed Reasoning - Meaning of 'provident, benefit, superannuation or retirement fund': 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 '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 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. Information available indicates that part of the benefits in the Fund can be accessed at any time (provided certain withdrawal conditions are met). As the benefits in the Fund can be accessed for pre-retirement purposes, the Fund does not meet the 'sole purpose test' and is therefore, not considered to be a 'superannuation fund' for Australian income tax purposes. Therefore, on the basis of the information provided, the Commissioner considers that a lump sum payment from the Fund is not a superannuation benefit 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 not apply to a lump sum payment received from the Fund. | Detailed Reasoning - Tax consequences of transferring the lump sum: Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia. Subsection 6-10(2) of the ITAA 1997 states that statutory income are amounts that are not ordinary income, but are included in the taxpayer's assessable income by provisions about assessable income. Section 10-5 of the ITAA 1997 lists those provisions about assessable income which are statutory income. Included in this list is section 99B of the ITAA 1936 which deals with amounts paid to, or applied for benefit of, a beneficiary of a trust estate. Subsection 99B(1) of the ITAA 1936 states that: Where at any time during the year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust estate who was a resident at any time during that year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2), include that amount. Subsection 99B(2) of the ITAA 1936 reduces the amount included as assessable income under subsection 99B(1) of the ITAA 1936 in certain circumstances. Paragraph 99B(2)(a) of the ITAA 1936 provides that so much of the amount representing the corpus of the trust estate is excluded from assessable income. Subsection 99B(1) of the ITAA 1936 will apply to lump sum receipts (distributions) from the traditional IRA subject to the application of subsection 99B(2) of the ITAA 1936. Part of the lump sum amount received by the taxpayer upon closing the traditional IRA represents corpus of the trust estate. This includes the pre-tax contributions made by the taxpayer and the contributions made by the US government. The amount of assessable income under subsection 99B(1) of the ITAA 1936 is reduced by these contributions. The amount included in assessable income under section 99B of the ITAA 1936 is further reduced through the operation of section 23AK of the ITAA 1936. The purpose of section 23AK of the ITAA 1936 is to prevent the double taxation of notional income previously included as assessable income under the foreign investment fund (FIF) provisions. For 23AK to apply there must be a FIF attribution account payment to the taxpayer and a FIF attribution debit must arise for the FIF attribution account entity (the trust estate) in relation to the taxpayer when the payment is made. The amount paid by the trustee of the non-resident trust estate to the beneficiary of the trust estate (that would otherwise be included in their assessable income under subsection 99B(1)) is a FIF attribution account payment (former paragraph 603(1)(f) of the ITAA 1936). A FIF attribution debit arises for the non-resident trust estate (the FIF attribution account entity) in relation to the taxpayer if the non-resident trust estate makes a FIF attribution account payment to the taxpayer and, immediately before the payment, there is a FIF attribution account surplus for the non-resident trust estate in relation to the taxpayer (former section 606 of the ITAA 1936). The taxpayer's income in respect of the IRA, prior to the 2010 financial year and repeal of the FIF rules may have been exempt from the FIF provisions through the operation of former section 515 of the ITAA 1936. Former section 515 of the ITAA 1936 provided an exemption from the taxation of a foreign investment fund accrued income if the value of the interests in FIFs and foreign life policies of the taxpayer and associates do not exceed $50,000 at the end of the financial year. In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. The tax treaty between Australian and the US (US Convention) and Protocol have the force of law according to subsection 5(1) of the Agreements Act. Article 21(1) of the US Convention provides that items of income of a resident of Australia, wherever arising not dealt with in the other Articles of the Convention shall be taxable only in Australia. As the income received by the taxpayer forms part of the other income category, Article 21 of the US Convention would apply. Accordingly, the lump sum amount to be paid upon closing the traditional IRA will be assessable income under section 99B of the ITAA 1936 subject to any exclusions under subsection 99B(2) of the ITAA 1936 and excluding amounts that would have been previously assessable under the prior FIF measures. | Detailed Reasoning - Conclusion: A withdrawal from the Fund of an amount that represents amounts contributed by you and your employer would come within paragraph 99B(2)(a) of the ITAA 1936. Distributions, to the extent that they come within subsection 99B(2) of the ITAA 1936, would be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936. However, the amount that represents income accumulated in the Fund (paid to you as a resident taxpayer) that is normally taxable in Australia and had not previously been subjected to tax in Australia would be assessable to you under subsection 99B(1) of the ITAA 1936.