Edited version of private ruling

Authorisation Number: 1011533142010

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Ruling

Subject: Substituted accounting period and assessability of foreign income from insurance bonds

Issue 1

Substituted Accounting Period

Question 1

Can you substitute the financial year of another country for the Australian financial year?

Answer

No.

Issue 2

Assessability of foreign income

Question 1

Are monthly distributions from foreign insurance bonds assessable in Australia?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2009

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

01 July 2008

Relevant facts

You became a resident of Australia for tax purposes on the date when you became partnered to an Australian resident and citizen. You held a tourist visa but now have been granted a temporary resident spouse visa a year later. You have not received permanent residency from the Department of Immigration.

You lodged an Australian tax return from the date you became a resident to 30 June in which you disclosed your foreign sourced income received from the date you became an Australian resident.

You foreign income consists of interest, dividends, rental income and monthly distributions from two insurance bonds.

The monthly distributions from the foreign insurance bonds are from a tax paid source and therefore not included in the tax return of the country from where they are paid.

The financial year of the other country is not the same as the Australian financial year.

The total of your interests and the interests of your associates in foreign companies, trusts and life policies is in excess of $50,000.

You have an insurance bond with company A which you acquired a few years ago. As this bond does not have a date of maturity, it can be redeemed, cancelled or surrendered at any time. On your death, payments are made to your estate and/or your beneficiaries. You provided details of the value of the bond at the date you became an Australian resident for tax purposes and at 30 June 2009. The monthly distribution is based on 5% of the initial investment each year.

You have an insurance bond with company B which you also acquired a few years ago. As this bond does not have a date of maturity, it can be redeemed, cancelled or surrendered at any time. On your death, payments are made to your estate and/or your beneficiaries. You provided details of the value of the bond at the date you became an Australian resident for tax purposes and at 30 June 2009. This bond also provides for a final bonus and early surrender charge. You also gave details of these amounts at the date you became an Australian resident and at 30 June 2009. The monthly distribution is based on 5% of the initial investment each year.

A copy of the terms and conditions of each policy has been provided.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 18

Income Tax Assessment Act 1997 Section 6-1

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-10(2)

Income Tax Assessment Act 1997 Division 770

Income Tax Assessment Act 1997 Subsection 770-10(1)

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953

Reasons for decision

Issue 1

Question 1

Section 18 of the Income tax Assessment Act 1936 (ITAA 1936) provides that any person may, with the leave of the Commissioner, adopt an accounting period being the twelve months ending on some date other than 30 June.

The Commissioner's practice in relation to substituted accounting periods (SAP) is set out in practice Statement PS LA 2007/21.

The Commissioner considers that Parliament has required a taxpayer to obtain the Commissioner's leave to adopt a SAP because income tax, an annual tax, would be very difficult to administer if every taxpayer was able to nominate his or her own accounting period, with the result that no one period was normal or standard. Regard must be had to this legislative purpose. A decision to grant or withhold leave to adopt a SAP therefore involves a balancing of convenience to the taxpayer with the general public interest in efficient administration of the Act.

Leave will be generally be granted to adopt a SAP where it can be demonstrated that the circumstances take the case out of the "ordinary run' (MLC Investments v FC of T 2003 ATC 5133).

Paragraph 32 of PS LA 2007/21states that there are no restrictions on who can apply for a SAP but it is expected most applicants would be entities, other than individual taxpayers, carrying on a business. It is difficult to identify circumstances in which leave under section 18 should be granted to individual taxpayers deriving income by way of salary and wages, pensions and or rents, dividends and interest.

In your case, you receive from another country interest, dividends, rental income and monthly distributions from insurance bonds. Interest and dividends are normally paid on a defined day either monthly, quarterly of half yearly. The amounts for these types of income would easily be obtained from statements issued to you or on-line from the financial institution or company. Rental income is normally calculated on an on-going cash basis. It would not be difficult to calculate the amount of net rental income for a defined period. The monthly distributions from your insurance bonds are paid on a regular basis. Details on the amount of your distribution would be on the statement from the insurance company or on the financial institution statement from the account into which the distribution is paid.

Irregularity of income from another country is not considered to be circumstances out of the ordinary. You have not demonstrated a need that makes 30 June inappropriate or impractical as an end of year date for reporting your income for the previous twelve months. Therefore a substituted accounting period based on the financial year of the other country is not granted under section 18 of the ITAA 1936.

Note:

Your proposal to declare 50% of the foreign sourced income, based on his tax return of the other country for the period from the date he became an Australian resident to 30 June is not appropriate. Your Australian income tax return for the year ended 30 June will need to include income derived from all sources in and out of Australia from the date you became an Australian resident for tax purposes.

Issue 2

Question 1

Section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income consists of ordinary and statutory income. Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997). Statutory income is income which is included in your assessable income by a provision or statue of the tax law (subsection 6-10(2) of the ITAA 1997).

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Your liability to tax is determined by your residency status. As you are an Australian resident for tax purposes, your assessable income includes income from all sources in Australia and elsewhere. Consequently, the monthly distributions from your foreign insurance bonds are included in your assessable income in Australia, notwithstanding that the income may have been exempt in the other country.

In determining liability to Australian tax on foreign source income it is necessary to consider not only the income tax laws but also any applicable double tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

A Schedule to the Agreements Act contains the tax treaty between Australia and the other country (the Convention). The Convention operates to avoid the double taxation of income received by residents of Australia and the other country.

An Article of the Convention deals with other items of income not expressly mentioned in the preceding articles of the tax treaty and provides that these items of income shall be taxable solely by the country of residence of the taxpayer. Therefore Australia has the taxing rights on the distributions received from insurance bonds which are derived from a foreign source.

Another Article of the Convention provides that, subject to the provisions of the law of Australia, a credit for tax paid in the other country under the law of that country and in accordance with the Convention will be allowed against Australian tax payable on income from sources in the other country.

Division 770 of the ITAA 1997 deals with foreign income tax offsets. For this division to apply there must be a nexus between the payment of the foreign income tax and the tax liability of the taxpayer. The tax on the distributions from your insurance bonds is actually paid by the insurance companies. Therefore, the insurance companies are liable to tax in their own right. As the foreign income tax paid by the insurance companies does not relate to a tax liability of yourself personally, you are not entitled to a foreign income tax offset under subsection 770-10(1) of the ITAA 1997.

In your case, no foreign country tax has been paid by yourself personally under the law of the foreign country as the tax on the distributions from the insurance companies has actually been paid by the insurance companies. As you have not paid any foreign country tax on this income, the full amount of the distributions from the insurance companies is included in your assessable income under subsection 6-5(2) of the ITAA 1997.

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