Australian Taxation Office

Offshore superannuation scheme

The Scheme

Offshore superannuation schemes had the following characteristics:

• The fund is a non-resident and non-complying fund with central management and control maintained overseas. It has no branches or permanent establishments in Australia and has no intention of establishing any.
• Participating employer maintains portfolios. Contributions are made by an employer (or an associate) to the fund in respect of employees who are nominated by the employer for membership.
• Membership is typically obtained only after a series of transactions. For example, the trustee invites the employee to make an application for membership, the employee applies and the trustee accepts the application.
• Employee member entitlements under the terms of the fund may either be fixed or discretionary. Where the employee’s entitlement is fixed, employer contributions are not allocated to an individual employee’s account until the employee becomes a member of the fund. Where the employee’s entitlement is discretionary, the contribution remains unallocated until the employee is entitled to receive it. Where employee membership is contingent upon the employee making a contribution to the fund, that contribution is usually financed by a limited recourse loan from the fund and both the contribution and the loan is offset against each other when they become repayable. Any interest on the contribution and loan (which is typically charged at the fringe benefits tax rate) is also offset against each other.

Example: offshore superannuation arrangement with fixed class members

1. The fund is a non-resident non-complying superannuation fund.
2. The employer (or associate) makes contributions to the fund, and a deduction is claimed for that contribution under section 82AAE.
3. Employer contributions are not allocated to individual employees is admitted as a member of the fund.
4. Employees become members only after the trustee invites them to apply for membership, the employee applies, the trustee accepts the application and the employee makes a contribution to the fund.
5. The employee's contribution is financed by a limited recourse loan from the fund, and both the contribution and the loan will be offset against each other at the time of repayment. Any interest on the contribution (charged at the FBT rate) and the loan will also be offset against each other.

The flow of funds

The tax mischief

Non-complying funds that generate tax concessions even greater than those provided to complying funds by Parliament create a tax mischief as these funds avoid contributions tax and surcharge even though there is a clear policy intent on what must be paid.

The taxpayer’s legal perspective:

The concessions claimed include deductibility of the contributions, no tax or surcharge in the hands of the fund, no age-based limits, no impact from reasonable benefits limits and no FBT liability. The end benefit is said to be tax free on withdrawal at any time. In extreme examples, any amount of income can be completely washed of tax.

Our legal perspective:

The Commissioner’s view is that, depending on the facts, one or more of the following applies:

• deductions under section 82AAE for an employer’s contribution is not allowed
• deductions under subsection 51(1) of the Income Tax Assessment Act 1936 (Cth) or section 8-1 of the Income Tax Assessment Ac 1997 (Cth) for the interest expense (if any) incurred by the employer in relation to a loan to finance a contribution is not allowed
• deductions under section 69 or subsection 51(1) of the Income Tax Assessment Act 1936 (Cth), or section 25-5 or section 8-1 of the Income Tax Assessment Act 1997 (Cth) for advisors’ fees in relation to the offshore superannuation scheme are not allowable
• fringe benefits tax applies to a contribution with the taxable value of the fringe benefit to the trustee equal to the amount of the contribution
• the trustee will not be exempt from Australian tax on a contribution, and the contribution to the superannuation fund will constitute a taxable contribution, as defined in section 274 of the Income Tax Assessment Act 1936 (Cth)
• section 108, section 109 and-or Division 7A applies to deem a contribution or loan a dividend from the employer if the employee is a shareholder (or an associate of a shareholder)
• part X of the controlled foreign companies provisions applies to fund members
• the foreign investment fund provisions of Part XI will apply to fund members
• The foreign investment fund provisions of Part XI will apply to fund members
• The non-resident trust provisions of Subdivision D of Division 6AAA of Part III will apply to participating employers and-or fund members to include the attributable income of the fund in their assessable income
• There will be application of the trust accrual provisions
• Part IVA may be applied to the arrangement, and
• Section 67 of the Fringe Benefits Tax Assessment Act 1986 (Cth) may be applied to the arrangement.

What you can do

The legislation was amended in 2000 so that there is no doubt that offshore superannuation schemes are no longer effective. If you were a participant in an offshore superannuation scheme you should contact the Tax Office on 1800 001 111 for advice about entering a settlement agreement.

Last Modified: Tuesday, 30 September 2003