Private ruling: Transfer from a foreign fund
Date of advice: 15 July 2019
Published: September 2019
Ruling period: 1 July 2015 - 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is any part of a lump sum payment from the Fund be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Are the annual withdrawals that your client receives assessable in Australia? | A2: Yes

Relevant facts and circumstances: Your client is an Australian resident for income tax purposes. For a number of years, until 2003 income year, they were employed in the office of an international organisation. The income they received from employment was exempt income. During their employment, your client joined a pension fund established and managed outside Australia. In 2016, your client received a lump sum from the Pension Fund. This was received after six months from the termination of their employment. Your client was an Australian resident during the period of employment. From 2016 income year, your client began to receive an annual pension from the Pension Fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1936 section 99B | Superannuation Industry (Supervision) Act 1993 section 10 | Superannuation Industry (Supervision) Act 1993 section 19 | Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision: Summary: There are no applicable fund earnings as the Fund does not fall within the definition of a foreign superannuation fund. | Detailed Reasoning - Foreign superannuation fund: 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. However, if the entity making the payment is not a foreign superannuation fund then section 305-70 will not have any application. A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as being a fund that is not an Australian superannuation fund. A superannuation fund has the meaning given by subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SISA), which requires that the fund is a 'provident, benefit, superannuation or retirement fund'. | 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 SISA, 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 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 et cetera. 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 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. 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. It is noted that the Fund satisfies some of the requirements of a foreign superannuation fund as it is established and operated outside Australia and the central management and control is outside of Australia. However, the Fund is not exclusively a provident, benefit or superannuation fund because it does not provide benefits for the specific future purposes of the individual's retirement. Members can withdraw benefits prior to retirement age. In other words, the Fund provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes. Accordingly, the Fund 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. | Detailed Reasoning - Receipt of trust income not previously subject to tax in Australia: A fund in the nature of a retirement or investment plan/fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder. Section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) deals with the receipt of trust income 'not previously subject to tax' in Australia and applies where an Australian resident taxpayer receives a lump sum payment from a foreign retirement or investment fund. Section 99B takes precedence over section 97 of the ITAA 1936 in assessing these types of payments. Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust who was a resident at any time during the year of income, the amount is to be included in the assessable income of the beneficiary. However, 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 does not include any amount that represents the corpus of the trust - but not an amount that is attributable to income of the trust which would have been included in the assessable income of a resident taxpayer if it had been derived by that taxpayer. Consequently, the assessable amount is the total amount received less any amounts deposited to the fund (the corpus) by the taxpayer, or on their behalf. The rule is that the taxpayer is taxed only on the earnings of the investment on withdrawal, not on the corpus returned to them. Any earnings in the funds are only assessable in Australia on withdrawal from the funds.