1 Is the Foreign Fund a 'foreign superannuation fund' as defined in section 994-1 of the Income Tax Assessment Act 1997 (ITAA 1997) ?
Yes Question 2 Does section 305-70 of the ITAA 1997 apply to the lump sum payment or payments to be received by the Taxpayer from the Foreign Fund? Answer Yes Question 3 Under section 305-70 of the ITAA 1997, what is the applicable fund earnings in respect of the lump sum amount that will be paid from the Foreign Fund to the Taxpayer? Answer Decline to rule. Question 4 Is an amount of tax payable on applicable fund earnings calculated under section 305-75 'offset' by any foreign tax which has been paid? Answer Decline to rule. This ruling applies for the following period : Income year ended 30 June 20XX The scheme commences on 1 July 20XX
The Taxpayer has an interest in the Foreign Fund. The Taxpayer has been a member of the Foreign Fund since 20XX. The Foreign Fund is a pension scheme established and managed outside Australia. Members of the Foreign Fund can generally get their money out when they are 65, or when they are 60 it is satisfied that the member has permanently retired. A member may be able to make a withdrawal earlier in limited circumstances, including on transition to retirement from age 55, significant financial hardship, and serious illness. The Taxpayer became a resident of Australia for taxation purposes in the 20XX-XX income year. Since the Taxpayer became an Australian resident, they have remained an Australian resident. The Taxpayer has not yet received a lump sum payment from the Foreign Fund, and intends to transfer the amount in the 20XX-XX income year.
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 305-70 Income Tax Assessment Act 1997 Section 305-75 Income Tax Assessment Act 1997 Subsection 995-1(1) Superannuation Industry (Supervision) Act 1993 Section 19 Superannuation Industry (Supervision) Act 1993 Section 62 Taxation Administration Act 1953 Section 357-110
Question 1 Summary: The Foreign Fund is a foreign superannuation fund as per subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). 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: a) the fund was established in Australia, or any asset of the fund is situated in Australia; 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 active members 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; iii) 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. 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 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 Superannuation Industry (Supervision) Act 1993 (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). 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. Notwithstanding that 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. In this case Members of the Foreign Fund can generally get their money out when they are 65, or when they are 60 it is satisfied that the member has permanently retired. A member may be able to make a withdrawal earlier in limited circumstances, including on transition to retirement from age 55, significant financial hardship, and serious illness. As the benefits in the Foreign Fund are paid only for retirement purposes, the Foreign Fund is a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997. Question 2 Summary Section 305-70 of the ITAA 1997 applies to the lump sum payment or payments to be received by the Taxpayer from the Foreign Fund. Detailed reasoning Lump sum payments received from certain 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 6 months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income. That is, it is tax-free (sections 305-60 of the ITAA 1997). Where a lump sum paid from a foreign superannuation fund is received more than 6 months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income.
In this instance, the Foreign Fund is a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997. Further, the Taxpayer became a resident of Australia for tax purposes in the 20XX-XX income year. The payment will be made more than six months after the Taxpayer became an Australian resident as they intend to transfer an amount in the 20XX-XX income year. Therefore, section 305-70 of the ITAA 1997 applies to the payment so that an amount of applicable fund earnings (if any) is included in their assessable income for the relevant income year. Question 3 Summary We are unable to provide an answer in relation to the taxation of an anticipated lump sum payment from the Foreign Fund. However, whilst we cannot give you a private ruling in this case, general advice on the calculation is provided. Detailed reasoning Section 357-110 of schedule 1 to the Taxation Administration Act 1953 provides that a private ruling does not have to be given where the Commissioner considers that the correctness of the private ruling would depend on which assumptions were made about a future event or matter.
In this case the Commissioner considers that the correctness of the private ruling would depend on assumptions made about a future event. The Commissioner declines to rule as the date and amount of payment from the Foreign Fund are not known with reasonable certainty. However, whilst we cannot give you a private ruling in this case, general advice on the calculation is provided. 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. 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 of growth, or 'applicable fund earnings' is calculated under subsection 305-75(3) of the ITAA 1997, which explains the following:
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: a) work out the total of the following amounts: I. 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; II. 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; III. 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. 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 tax). c) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident. d) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).
The effect of subsection 305-75(3) of the ITAA 1997 is that the Taxpayer is only assessed on the income earned on their benefits in the Foreign Fund since they became an Australian resident. Any amounts from contributions made by (or on behalf of) the Taxpayer or transferred from other foreign funds are not taxable in Australia when the overseas benefit is paid. Question 4 Summary We are unable to provide an answer in relation to the taxation of an anticipated foreign fund transfer as outlined in your application, as the Commissioner considers that the correctness of the private ruling would depend on which assumptions were made about a future event or other matter. However, whilst we cannot give you a private ruling in this case, general advice on the calculation is provided. Detailed reasoning Foreign income tax offset A foreign income tax offset (FITO) is a non-refundable tax offset, that will reduce the amount of Australian tax payable on foreign income which has been subjected to foreign income tax.
The offset provides relief from double taxation. You may be able to claim the FITO if you've paid foreign tax in another country on an amount (e.g. income) that is taxable in Australia. To be able to claim a foreign income tax offset, you must: a) Have actually paid, or be deemed to have paid, an amount of foreign income tax on your foreign income, and b) The income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes. The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year. In some circumstances, the offset is subject to a limit (section 770-70 of the ITAA 1997). If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset limit. This means you will only be able to claim a FITO for the amount of foreign tax paid in the years since you have returned to Australia.
For more information on claiming a FITO please go to www.ato.gov.au and search for QC 33244. For further information on calculating the offset search QC 67996.