1 Should Plan Number 1 (a xxxx plan funded by Company B) be regarded as a foreign trust for Australian tax purposes so that only post-residency growth is included in assessable income?
1 No Question 2 Should Plan Number 2 (xxxx) under Country D law) be treated as a foreign superannuation fund such that only post-residency growth (applicable fund earnings) is included in assessable income? Answer 2 No Question 3 Should Plan Number 3 (a xxxx plan funded by Company B) be regarded as a foreign superannuation fund with only post-residency growth assessable? Answer 3 No Question 4 Can Country D xxxx income tax paid on distributions from the above plans be applied as a foreign income tax offset (FITO) under Division 770, subject to the Australian FITO cap? Answer 4 Yes, but only to the extent that: • the Country D tax was paid by or on behalf of Person A on the distributions • Person A isn't entitled to any refund of this Country D tax paid, and • the distributions (gross of Country D tax paid) are included in Person A's assessable income for Australian tax purposes (under section 6-5 or section 99B). This ruling applies for the following : a 5 year period
1. Person A has been employed by various entities in the Company B group for many years. 2. Person A moved to Country C in Year X and became a tax resident of Country C. 3. Person A was employed by Company B (Country D) from Year Y to Year Z. 4. While employed by Company B (Country D), Person A became a member of three Company B Country D retirement plans: • XXXX plan • XXXX plan • XXXX plan. 5. Person A left Country C and became an Australian tax resident in Year Z. 6. The applicant gave us supporting documents about the rules in each of these Company B retirement plans. We treat the full terms of these documents as incorporated in the facts and circumstances of this private ruling. We summarise what we see as the most relevant clauses in the Table. However, the full terms of the document prevail over our summary to the extent of any inconsistency. Table 1: summary of the Company B retirement plans Plan Details Plan Number 1 • Restricted to employees with annual salary over $X.
• Participating employees can defer up to X% of eligible pay and receive matching contributions. • Accounts are 'notional' - merely recordkeeping devices that don't hold actual assets. • All elective deferrals are unfunded obligations paid out of Company B's general operating assets and aren't secured. • The value of the excess plan account balance is indexed to the returns realised in the employee's investment choices, but the excess plan is unfunded and no assets are actually invested in the investment choices. • Company B contributions are deferred until the participating employee terminates employment from the Company B group, and aren't available for distribution during employment. The plan doesn't permit loans, hardship withdrawals, or in-service withdrawals. • Employees can withdraw funds from the plan at the earliest of several 'distribution events': they include retirement/termination, death, and disability.
• Deferred funds remain part of Company B's general assets: a book reserve or notional account is established to reflect the employee's interest, but the employee's status is that of a general unsecured creditor. Plan Number 2 • Company B offers participating employees a mix of investment options (e.g. diversified mix of stocks, bonds, and commodities geared to a particular age or risk tolerance). • Participants may borrow money from the plan under certain conditions. • Participants may make 'in service' withdrawals, while still working, once they have reached a specified age or on other grounds including 'hardship', and may withdraw 'after tax' contributions for any reason. • Participating employees can access distributions once they terminate their employment or become permanently disabled. • The plan has a trustee. Plan Number 3 • Company B makes all contributions (in other words, employees don't make contributions under this plan) and Company B bears all the investment risk.
• Participating employees begin receiving benefits on separation but may choose to defer benefits until they reach retirement age. • The plan has trust assets managed under guidelines established by a committee, which selects trustees and managers to manage those trust assets. The plan names a trustee company as trustee.
Income Tax Assessment Act 1997 Section 6-5 Section 15-2 Section 305-55 Section 305-70 Section 305-75 Section 770-10 Section 995-1 Income Tax Assessment Act 1936 Section 99B Superannuation Industry (Supervision) Act 1993 Section 10
Question 1 Should Plan Number 1 be regarded as a foreign trust for Australian tax purposes so that only post-residency growth is included in assessable income? Answer No Explanation Plan Number 1 isn't a trust for Australian tax purposes because there's no trust property: it's just a notional account balance representing a debt Company B owes to the employee. 7. Rules in Division 6 assess beneficiaries and trustees on amounts or shares of the net income of trust estates. 8. TR 2012/D1 [1] at paragraphs 83-84 says that the phrase 'trust estate' in Division 6 means property vested in a trustee. 9. Plan Number 1 doesn't qualify as a trust under Australian tax purposes. It isn't a trust because no trust property is vested in a trustee to hold on behalf of beneficiaries. Rather, participating employees just have a claim as unsecured creditors against Company B. Payments from Plan Number 1 are assessable income to Person A under section 6-5. 10. Section 6-5 includes income according to ordinary concepts in assessable income. 11. TR 2006/3 [2]
at paragraph 85 says a payment in consideration for the performance of services is generally income. 12. Section 15-2 includes allowances, gratuities, compensation, benefits, bonuses, and premiums in assessable income, where they are "provided to you in respect of, or for or in relation directly or indirectly to" any employment of or services rendered by you. 13. Subsection 15-2(3) excludes some items from section 15-2, including superannuation lump sums, employment termination payments, and ordinary income. 14. All payments to Person A from Plan Number 1 will be assessable under section 6-5. Plan Number 1 allows employees to take some of their pay package as deferred compensation. Therefore, it's consideration for the performance of services, and has the character of ordinary income. 15. If payments from Plan Number 1, for any reason, weren't assessable under section 6-5, they would nevertheless be assessable under section 15-2. • They are compensation provided to employees for (or 'in respect of' or 'in relation directly or indirectly to') employment.
• They aren't 'superannuation lump sums' because employees may access Plan Number 1 before retirement if they terminate their employment before retirement. (See paragraphs 16 to 22.) • They aren't 'employment termination payments'. The balance in the account accrues over time throughout employment and may be paid out in circumstances other than on termination. Therefore, the payments aren't received in consequence of termination of employment. (See section 82-130.) Question 2 Should Plan Number 2 be treated as a foreign superannuation fund such that only post-residency growth (applicable fund earnings) is included in assessable income? Answer No Explanation Subdivision 305-B won't apply: Plan Number 2 doesn't qualify as a superannuation fund because it permits withdrawals on termination, not just retirement. 16. The effect of Subdivision 305-B is that when you receive a superannuation lump sum from a foreign superannuation fund later than 6 months after you became an Australian resident, you're assessed on post-residency earnings: see section 305-70 and subsection 305-75(3), read with sections 305-60 and 305-65.
17. Subdivision 305-B will also apply to a payment under a scheme for paying benefits "in the nature of superannuation upon retirement or death" (where the scheme isn't a superannuation fund, wasn't established in Australia, and isn't 'centrally managed and controlled' in Australia) in the same way as if it was a superannuation lump sum from a foreign superannuation fund. See subsections 305-55(2) and 305-55(3). 18. A 'foreign superannuation fund' is a superannuation fund that isn't an Australian superannuation fund: see section 995-1. 19. 'Superannuation fund' includes a fund that is an indefinitely continuing fund, and is a provident, benefit, superannuation or retirement fund. See section 10 of the Superannuation Industry (Supervision) Act 1993. 20. ATO ID 2009/67 [3] says for a fund to meet the 'provident, benefit, superannuation or retirement fund' condition, the fund's sole purpose must be to provide benefits who either (1) cease employment after (a) reaching retirement age, (b) satisfying service requirements, or (c) suffering death or disability, or (2) reach age 70.
21. Plan Number 2 doesn't qualify as a superannuation fund. It's possible for Company B employees to withdraw funds from the plan when their employment is terminated, rather than in any of the circumstances listed in ATO ID 2009/67. Therefore, the sole purpose of the plan isn't to provide benefits for permitted purposes. 22. Since Plan Number 2 isn't a superannuation fund, payments from it aren't superannuation lump sums from a foreign superannuation fund. 23. Plan Number 2 also doesn't qualify as a scheme "in the nature of superannuation upon retirement or death" for the same reason: it's possible for employees to withdraw funds if they terminate employment before retirement or death. 24. Therefore, the Subdivision 305-B treatment won't apply to payments from Plan Number 2. Section 99B will apply to tax Person A on all pre- and post-residency accumulations. 25. We mentioned Division 6 at paragraph 7. 26. Plan Number 2 will qualify as a trust estate for Division 6 purposes. Plan Number 2 (unlike Plan Number 1) features a trustee holding trust property on behalf of members.
27. Section 99B assesses beneficiaries who are paid an amount of property of a trust estate (where they haven't been already assessed under another provision), reduced by amounts representing: • corpus of the trust estate (excluding amounts that would have been assessed if derived by a resident taxpayer), or • amounts that wouldn't have been assessed if derived by a resident taxpayer. 28. TD 2024/9 [4] at paragraph 20 says that accumulated income is included in corpus, but it will be attributable to amounts that would be assessable income if derived by a hypothetical resident taxpayer. 29. Payments to Person A will be assessed on all pre- and post-residency accumulations under section 99B. Amounts representing contributions will be excluded (as corpus) under paragraph 99B(2)(a). However, following TD 2024/9, accumulations on contributions won't be excluded from the section 99B assessment. Question 3 Should Plan Number 3 be regarded as a foreign superannuation fund with only post-residency growth assessable? Answer No Explanation
30. Our reasons are essentially the same as for Question 2. Plan Number 3 isn't a superannuation fund because, like Plan Number 2, members may withdraw funds on termination. Question 4 Can Country D federal income tax paid on distributions from the above plans be applied as a foreign income tax offset (FITO) under Division 770, subject to the Australian FITO cap? Answer Yes, but only to the extent that: • the Country D tax was paid by or on behalf of Person A on the distributions • Person A isn't entitled to any refund of this Country D tax paid, and • the distributions (gross of Country D tax paid) are included in Person A's assessable income for Australian tax purposes (under section 6-5 or section 99B). Explanation 31. Section 770-10 allows a tax offset for foreign income tax. Foreign income tax counts towards the tax offset if you paid it in respect of an amount that's "all or part of an amount included in your assessable income".
32. Person A will be eligible for a FITO to the extent that the plans paid this Country D tax as withholding tax agents on behalf of Person A, or Person A has otherwise paid Country D tax on these distributions, and the gross distributions have been included in Person A's assessable income for Australian tax purposes (and Person A isn't entitled to a refund for the Country D tax already paid). > [1] Draft Taxation Ruling TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions. [2] Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence, or cease business. [3] ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents. [4] Taxation Determination TD 2024/9 Income tax: factors taken into account in applying paragraphs 99B(2)(a) and (b) of the Income Tax Assessment Act 1936.