Edited version of private advice

Authorisation Number: 1051517688400

Date of advice: 26 July 2019

Ruling

Subject: Foreign fund transfer

Q1 What will the tax treatment be for the payment received from a retirement/pension fund from the Country A?

Q2.Will you be able to apply any tax credit from the tax paid/withheld in the Country A if this payout amount is taxable in Australia?

Q3.Will you be able to roll the lump sum payment into your Australian Superfund? If yes, what will the tax treatment be?

Answer

Q1. The lump sum will be assessed as trust income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Q2. Yes. You will be able to claim a foreign income tax credit in respect of foreign income tax paid on an amount that is included in your assessable income.

Q3. No. The lump sum superannuation payment had been paid to your bank account. The superannuation payment you received does not meet the definition of a rollover.

This ruling applies for the following period:

30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You are an Australian citizen and worked in the Country A from 19XX.

You were based overseas working five weeks away and then back to Australia for five weeks.

In 19YY you were offered to participate in a Retirement Plan.

Employer and member contributions were made to the Retirement Plan.

There are important clauses under your Summary Retirement Plan Description:-

·        If you terminate employment before age sixty (60) for reasons other than death or disability, you are entitled to one hundred percent 100% of all your accounts plus your vest percentage in your employers matching contribution account (page 4).

·        If you leave the employment, the vested portion of your account will be distributed to you any time you choose, except that you will receive a lump sum distribution of your vested interest as soon as practicable after your termination of employment if your vested interest does not exceed $3,500.

·        Payment can be made to you according to one of the methods:-

                                          i.     If you are married, you will automatically receive a qualified joint and survivor annuity unless you and your spouse choose another type of benefit payment in the manner described below.

                                         ii.     If you are single, you may receive your benefit in an annuity for the remainder of your lifetime.

                                        iii.     The third payment option is a lump sum payment.

                                       iv.     The fourth payment option is to receive instalment payments from the Plan on selected intervals for up to a ten (10) year period.

·        You always have a right to that part your accounts attributable to any contributions you may make. This is often referred to as having a vested right in such portion of your account(s).

You did not have a superannuation fund in Australia while working overseas.

In 20ZZ you ceased employment and began your employment in Australian permanently.

No more contributions were made by you after the termination of your employment in the Country A.

In 20XY your retirement fund was wound up for all employees and ex-employees.

In late 20XY a lump sum payment was made into your bank account in Australia.

Tax credits are being held by your retirement fund in the Country A. According to the Notice of Income Tax Withholding, you pay 10% federal income tax on your payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6

Income Tax Assessment Act 1997 section 10

Income Tax Assessment Act 1997 section 295-95

Income Tax Assessment Act 1997 Division 305

Income Tax Assessment Act 1997 section 770-15

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 section 770-70

Income Tax Assessment Act 1997 section 770-75

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1936 section 99B

Reasons for decision

Tax treatment for the Lump sum payments received from overseas entity

Division 305 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the tax treatment of superannuation benefits received by individuals from non-complying superannuation plans. Subdivision 305-B deals specifically with superannuation lump sums from foreign superannuation funds.

When the payment was made from an entity other than a foreign superannuation fund, the payment will be assessed under the trust income provisions under the ITAA 1936.

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.

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1.

Relevantly, 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.

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1.

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.

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.

Meaning of 'provident, benefit, 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'.

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.

Application of the law

Your retirement fund does not have the provisions of 'provident, benefit or superannuation fund'.

A 401k retirement fund satisfies some of the requirements of a foreign superannuation fund, 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. For example, you have the option to withdraw the superannuation benefits any time. In other words, a 401k fund provides for the payment of benefits for reasons other than retirement and not solely (that is, exclusively) for retirement purposes.

Your retirement plan is not a superannuation fund when the benefits could be paid in the circumstances other than those relating to retirement. This meant the fund that paid you is not a foreign superannuation fund, therefore Division 305 of the ITAA 1997 does not apply.

Trust income previously subject to tax in Australia

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the ITAA 1936 which deals with receipt of trust income not previously subject to tax in Australia.

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, the 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:

·        The corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)

·        Amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and

·        Amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA 1936).

Application of the law

The nature of a retirement fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder.

The conditions in subsection 99B(1) of the ITAA 1936 are satisfied as you received an amount of trust property during an income year in which you were a resident.

The receipt of the payment would come within paragraph 99B(2)(a) of the ITAA 1936; and the amount would be considered to represent the corpus of the trust.

Only the income accumulated in the retirement fund paid as a resident taxpayer that is normally taxable in Australia and had not previously been subject to tax in Australia will be included in the assessable income.

Therefore, it is the gross amount received converted to Australian dollars, less the amount that represents deposits to the fund converted to Australian dollars, that is the amount assessable under subsection 99B(1) of the ITAA 1936, and the amount required to be declared in the tax return.

Foreign Income Tax Offset

A taxpayer is entitled, under subsection 770-10(1) of the ITAA 1997, to a foreign income tax offset in respect of foreign income tax paid on an amount that is included in their assessable income.

Subsection 770-15(1) gives the following definition of foreign income tax:

Foreign income tax means tax that:

(a) is imposed by a law other than an * Australian law; and

(b) is:

(i) tax on income; or

(ii) tax on profits or gains, whether of an income or capital nature; or

(iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

Note: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953), has been correctly imposed in accordance with that tax treaty.

Under section 770-70 of the ITAA 1997 it states that the amount of your tax offset for the year is the sum of the foreign income tax you paid that counts towards the offset for the year.

When part of an amount on which foreign tax has been paid is assessable, the same proportion of the foreign tax counts towards the offset.

There is a limit on the amount of your tax offset for a year (section 770-75 of the ITAA 1997). If you claim an offset of $1,000 or less, you only need to record the actual amount of foreign income tax paid that counts towards the offset.

If you claim more than $1,000, you will have to work out your foreign income tax offset limit. You can find the example to calculate the offset in our website www.ato.gov.

Application of the law

In your case, you pay COUNTRY A income tax when you are paid the lump sum payment.

If the foreign tax is withheld from your gross payment under the law of the foreign country, you are entitled to a foreign income tax offset under section 770-10 of the ITAA 1997 for the tax paid on a proportionate basis for the share of foreign income included in your assessable income.

You will need to apportion your foreign tax paid over the assessable and non-assessable component of the lump sum withdrawn on which the foreign tax was imposed.

Once you calculate the amount of foreign tax paid in proportion to the foreign income included in your assessable income, you can decide whether you will elect to use either the foreign income tax offset cap or the 'de minimis cap'.

Lump sum roll-over

Under section 306-10 of the ITAA 1997 a *superannuation benefit is a roll-over superannuation benefit if:

(a) the benefit is a *superannuation lump sum and a *superannuation benefit; and

(b) the benefit is not a superannuation benefit of a kind specified in the regulations; and

(c) the benefit satisfies any of the following conditions:

(i) it is paid from a *complying superannuation plan;

(ii) it is an *unclaimed money payment;

(iii) it arises from the commutation of a *superannuation annuity; and

(d) the benefit satisfies any of the following conditions:

(i) it is paid to a complying superannuation plan;

(ii) it is paid to an entity to purchase a superannuation annuity from the entity.

Application of the law

The superannuation lump sum payment you received is not from a complying superannuation fund.

Your bank account is not a complying superannuation plan. Therefore the payment you received is not a roll-over payment as defined under section 306-10 of the ITAA 1997.

Any contributions made from the lump sum payment to an Australian superannuation fund will be classed as a non-concessional contribution and will be subject to the contributions caps.