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Authorisation Number: 1013048532788
Date of advice: 8 July 2016
Subject: Foreign trust income
Is any part of the lump sum payments from your Individual Retirement Account from Country X assessable under section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Are the lump sum payments from the Individual Retirement Account to be included in your assessable income under Section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?
Are any parts of the lump sum payments non-assessable under paragraph 99B(2)?
Will any tax withheld by Country X's taxation department be recognised as foreign tax credits in Australia for income tax purposes?
This ruling applies for the following period(s)
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commences on
1 July 2016
Relevant facts and circumstances
You are an Australian resident for tax purposes.
For the past XX years you have been working for foreign based companies.
As part of your employment conditions your employer created an Individual Retirement Account (IRA).
The IRA was established, administered and managed in Country X.
You are planning to retire in the near future.
As part of your transition to retirement you are planning to transfer the funds held in your IRA to Australia in four lump sum payments over four years.
As of 20XX your IRA held a total of $ XXX. This includes $ XX of employee contributions.
You have ceased making employee contributions.
You intend to withdraw the funds in four lump sum payments over a number of years.
It is your understanding that when you withdraw the lump sums from your IRA you will incur a tax on the taxable portion of the payment in Country X.
Due to the nature of the IRA, you consider it to be a classed as a foreign trust.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-10
Income Tax Assessment Act 1997 subsection 6-10(4)
Income Tax Assessment Act 1997 section 10-5
Income Tax Assessment Act 1936 subsection 99B(1)
Income Tax Assessment Act 1936 paragraph 99B(2)
Income Tax Assessment Act 1936 subsection 481(3)
Reasons for decision
Income that is withdrawn from the IRA are similar to a distribution from a trust any amounts distributed (withdrawn) or credited from your IRA are assessable under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) less any amounts excluded under subsection 99B(2).
Questions 1, 2 and 3
You have an IRA in Country X, which is an individual retirement account. The Country X revenue agency has a publication (Publication 590) which states that an IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement. It describes an individual retirement account as a trust or custodial account set up in Country X for the exclusive benefit of you or your beneficiaries.
The IRA is a foreign trust as defined in subsection 481(3) of the ITAA 1936 and is therefore a foreign investment fund (FIF). The IRA is not a superannuation fund for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997) and the ITAA 1936 as it allows for withdrawals for pre-retirement purposes. Therefore an IRA is not established solely for the provision of retirement benefits.
Repeal of FIF measures
On 14 July 2010, the FIF measures were repealed and do not apply from the 2010-11 income year onwards.
If you have an interest in a FIF, you will be subject to the general tax rules applicable to your circumstances - for example, the general tax rules relating to trust income.
Assessability of trust income
Section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.
Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.
Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the Income Tax Assessment Act 1936 (ITAA 1936).
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 99B(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 ITAA1936).
Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).
In this case, you intend to withdraw lump sum amounts from the IRA, at the time of the withdrawals it is deemed that income has been paid to you or applied for your benefit. Therefore, withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from your IRA are assessable under subsection 99B(1) of the ITAA 1936 less any amounts that would fall under subsection 99B(2).
Whether you are eligible for a foreign tax credit is dependent on the relevant double tax agreement between Australia and Country X.
Australia has a tax treaty with the Country X Convention). The Country X Convention operates to avoid the double taxation of income received by Australian and Country X residents.
Under Article 21 of the Country X Convention your client's share of distributions from Country X are taxed in the country of source and may be taxed in Australia. However, Article 22 of the Country X convention provides for relief from double taxation. Accordingly, your client will be entitled to a foreign income tax offset in respect of the foreign tax paid in Country X.
In your case, you will be eligible to a foreign income tax offset as long as you paid income tax to the IRS in Country X. Should that occur you will also be eligible as the lump sum amounts will be assessable to you under subsection 99B(1).
Calculating the offset
If claiming an offset of $1,000 or less, you only need to record the actual amount of foreign income tax paid on your assessable income (up to $1,000).
If claiming a foreign income tax offset of more than $1,000, you will first need to work out you foreign income tax offset limit.
For further information please refer to the Guide to foreign income tax offset rules 2016, which is available on the Tax Office website at www.ato.gov.au at QC 48121.
Other issues for you to consider:
You have indicated that the amount contributed by your client is $XXX. This amount would be considered to be the corpus or capital of the trust and is not assessable. You have also indicated that $XXXX was the earnings on the account. This would be the portion that is assessable under subsection 99B(1) as this amount has not yet been taxed.