ATO Interpretative Decision

ATO ID 2007/182

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does an interest held by an Australian resident taxpayer in an individual retirement account (IRA) set up in the United States of America (US), qualify as 'an interest in a foreign investment fund (FIF) that is a foreign trust' for the purposes of section 483 of Part XI of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. An interest held by an Australian resident taxpayer in a US IRA will qualify as 'an interest in a FIF that is a foreign trust' for the purposes of section 483 of Part XI of the ITAA 1936.

Facts

An individual was formerly a resident of the US and worked for many years in the US.

The individual is now retired and resides in Australia.

The individual entered into an agreement with a US company (the custodian) to establish an IRA.

The funds in the account are contributed by the individual and invested in a wide range of investments such as stocks and bonds which are legally held by the custodian. The account is self-directed, in that; the choice of investments is up to the individual.

The US IRA is established for the exclusive benefit of the individual and his/her nominated beneficiaries.

The total value of the interest held by the individual in the IRA at the end of the year of income is greater than $AUD 50,000.

The IRA established for the individual is not a 'foreign company' as defined in subsection 481(2) of Part XI of the ITAA 1936.

The year of income in question is the 1992-93 year of income or a later year of income.

The individual is a Part XI Australian resident (as defined in section 470 of the ITAA 1936) at any time during the year of income.

Reasons for Decision

The FIF measures are contained in Part XI of the ITAA 1936 and generally apply to Australian residents who have an interest or interests in a FIF at the end of a year of income.

In particular, subsection 485(3) of Part XI of the ITAA 1936 provides that the operative provision section 529 of the ITAA 1936 will apply to include an amount of FIF income in a taxpayer's assessable income where all of the following apply:

•

the taxpayer had an interest or interests in a FIF at the end of a year of income

•

the year of income is 1992-1993 or a later year of income, and

•

the taxpayer was a Part XI Australian resident at any time in that year of income.

As the year of income is later than 1992-1993 and the individual taxpayer is a Part XI Australian resident, the only necessary consideration in this case is whether the individual taxpayer had an interest in a FIF at the end of the year of income.

To determine whether a taxpayer has an interest in a FIF, it is first necessary to establish whether a FIF exists.

According to subsection 481(1) of the ITAA 1936, an entity is a FIF at a particular time if, at that time, the entity is a 'foreign company' or a 'foreign trust'.

(a)

a company

(b)

a partnership

(c)

a person in the capacity of trustee

(d)

any other person.

As noted above, the IRA established for the individual taxpayer is not a 'foreign company' as defined in subsection 481(2) of the ITAA 1936. However, the IRA arrangement may qualify as a 'foreign trust' as defined in subsection 481(3) of the ITAA 1936.

A 'foreign trust' is defined in subsection 481(3) of the ITAA 1936 accordingly:

A trust is a foreign trust at a particular time if:

(a)

at that time the trust is neither an Australian trust, nor a resident Part IX entity; and

(b)

the trust did not result from:

(i)

a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil, or

(ii)

an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate. (Emphasis added)

The first requirement in the definition is that there is a 'trust'.

A 'trust' is defined in section 470 of the ITAA 1936 for the purposes of Part XI of the ITAA 1936 to mean:

(a)

an entity in the capacity of trustee (including an entity that is taken to be a trustee because of section 268); or

(b)

as the case requires, a trust or a trust estate.

Section 268 of Part IX of the ITAA 1936 provides that:

Where, apart from this section, there is in relation to a fund no person who is a trustee of the fund for the purposes of this Part, the person, or each of the persons, who manages the fund shall be taken, for the purposes of this Part, to be the trustee, or a trustee, as the case requires, of the fund.

In considering whether the IRA is a 'trust', consideration must be given as to whether the custodian is 'an entity in the capacity of trustee'. For the custodian to be 'an entity in the capacity of trustee' it is necessary for it to come within the definition of 'trustee' and it must also be established that a trust relationship exists between the custodian and the individual taxpayer.

'Trustee' is defined in subsection 6(1) of the ITAA 1936 as follows:

trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:

(a)

an executor or administrator, guardian, committee, receiver, or liquidator; and

(b)

every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

'Trustee' is also defined in section 470 of the ITAA 1936, in relation to a fund that has no trustee, to mean 'a person who is a trustee of the fund for the purposes of Part IX'.

French J in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 (Harmer) stated that a trust 'is notably a definition of a relationship by reference to obligations'. He went on to state that the four essential elements of a trust are:

1.

the trustee who holds a legal or equitable interest in the trust property

2.

the trust property which must be property capable of being held on trust and which includes a chose in action

3.

one or more beneficiaries other than the trustee; and

4.

a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property.

In the present case, the IRA is an agreement between the individual taxpayer and the custodian for the custodian to hold and invest certain property for the benefit of the taxpayer and his/her nominated beneficiaries.

The custodian has legal ownership and possession of the relevant property. The terms of the agreement impose on the custodian a personal obligation to deal with the relevant property for the benefit of the individual and his/her nominated beneficiaries. Therefore, the custodian is a 'trustee' in relation to the relevant property.

The relevant property consists of the contributions made by the individual taxpayer to the IRA (plus profits) and constitutes the 'trust property', because of the obligation owed by the custodian to the individual taxpayer in relation to that property. The individual is a 'trust beneficiary', as it is for the individual's benefit that the trust property is held. The nominated beneficiaries of the individual are another class of potential trust beneficiaries.

Having regard to the relationship between the custodian and the individual taxpayer under the agreement, there is an express intention that the custodian holds the property, not exclusively for itself, but subject to an equitable 'obligation'. Therefore, the relationship constitutes an express trust.

All four elements of a trust as outlined in Harmer are present so there is a 'trust' as required by subsection 481(3) of the ITAA 1936. The custodian, because it is acting as a trustee, is (under the definition of 'entity' in paragraph 470(c) of the ITAA 1936) 'a person in the capacity of trustee'.

The custodian is a 'trustee' in accordance with the definition in subsection 6(1) of the ITAA 1936, as the custodian is a person having or taking upon itself the administration or control of income affected by any express or implied trust and is also acting in a fiduciary capacity. There is a clear trust relationship between the custodian and the individual taxpayer.

Note that, even if the custodian was not a 'trustee' under the definition in subsection 6(1) of the ITAA 1936, the custodian would be a 'trustee' as defined in section 470 of the ITAA 1936, because it would be a person who is a trustee of the fund for the purposes of section 268 of Part IX of the ITAA 1936.

Having established that there is a trustee and a trust, the next requirement is for the US IRA trust to be a 'foreign trust'. For this to be the case, the US IRA trust must be neither an 'Australian trust' nor a 'resident Part IX entity'.

The IRA arrangement does not satisfy the definition of 'Australian trust' in section 473 of the ITAA 1936, neither does it satisfy the definition of 'resident Part IX entity' in section 477 of the ITAA 1936.

The US IRA is a US trust, it is not a resident Part IX entity; and it did not result from any of the means described in paragraph 481(3)(b) of the ITAA 1936 (that is, such as resulting from a will or codicil, or an order of a court that varied or modified the provisions of a will or a codicil).

Accordingly, the US IRA qualifies as a 'foreign trust' and therefore a FIF at the end of the year of income under subsection 481(3) of the ITAA 1936. All that now needs to be determined is whether the individual taxpayer has an 'interest' in the FIF that is the foreign trust.

'An interest in a FIF that is a foreign trust' is defined in subsection 483(2) of the ITAA 1936 as:

(a)

an interest in the corpus or income of the trust (including, in the case of a unit trust, an interest constituted by a unit in the unit trust); or

(b)

an option, convertible note, or other instrument, that confers an entitlement to acquire an interest referred to in paragraph (a).

The individual taxpayer has an interest in the corpus and income of the US IRA trust. As the trust created by the US IRA is 'a FIF that is a foreign trust', and the individual taxpayer has an interest in the corpus or income of that trust, then the individual taxpayer has 'an interest in a FIF that is a foreign trust' for the purposes of subsection 483(2) of the ITAA 1936.

Year of income:  Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1936
   subsection 6(1)
   section 268
   section 470
   section 473
   section 477
   subsection 481(1)
   subsection 481(2)
   subsection 481(3)
   section 483
   subsection 483(1)
   subsection 483(2)
   subsection 485(1)
   subsection 485(3)
   section 529

Case References:
Harmer & Ors v. FC of T
   89 ATC 5180
   20 ATR 1461

Related ATO Interpretative Decisions
ATOID 2003/1188

Keywords
Entities and taxpayer groups
Foreign investment fund measures
International tax
Trustees
Trusts

Business Line:  International Centre of Expertise

Date of publication:  21 September 2007

ISSN: 1445-2782