Edited version of private ruling

Authorisation Number: 1011557884695

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Ruling

Subject: Assessable income

Question 1

Are the distributions from your savings accounts in country X assessable in Australia?

Answer: Yes.

Question 2

Are you assessable under the capital gains tax provisions on your investments in the savings accounts?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You are an Australian resident for tax purposes.

When you resided in country X, you invested in savings accounts.

The savings account remains in country X and income is reinvested to the account (but no further contributions can be made to the account).

In country X income credited to the account in the form of interest or dividend receipts is not taxable in the recipient's hand.

You were also advised that the amount deposited in a savings account is not disclosed on a personal tax return in country X.

There is a tax treaty between Australia and country X.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 6-5(4)

International Tax Agreements Act 1953

Income Tax Assessment Act 1997 Section 136-40

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an Australian resident taxpayer's income includes ordinary income derived during the income year from all sources, whether in or out of Australia.

A distribution from a unit trust is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-5(4) of the ITAA 1997 provides that a taxpayer derives an amount of ordinary income when the amount is received, or when it is dealt with in any way on the taxpayer's behalf or as the taxpayer directs.

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

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one.

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

An Article of the country X Convention deals with the taxation of income not addressed by the other Articles of the country X Convention. This Article of the country X Convention gives Australia a taxing right on the distribution from a unit trust which is derived from a country X source and paid to a resident of Australia.

In your case, your investment in the savings account is an investment account held in a foreign trust and therefore the distributions you receive from the trust are assessable income in Australia under subsection 6-5(2) of the ITAA 1997.

Capital Gains Tax (CGT)

The CGT provisions are contained in Parts 3-1 and 3-3 (sections 100-1 to 152-425) of the ITAA 1997. These provisions do not apply to assets acquired by taxpayers before 20 September 1985.

Your savings account investment is a CGT asset. Termination or surrendering of this investment would constitute a CGT event happening to this asset.

However, section 136-40 of the ITAA 1997 provides special cost base and acquisition rules that apply to CGT assets (excluding assets located in Australia) that a taxpayer owned before becoming an Australian resident. The special cost base rule is that the first element of the cost base and reduced cost base of the asset is the market value of the asset at the time the taxpayer became an Australian resident. The special acquisition rule is that the taxpayer is deemed to have acquired the asset at the time of becoming an Australian resident.

In calculating the capital gain(s) and / or capital loss(es) on your overseas investments, you should keep in mind the following:

- you are deemed to have acquired the investments at the time of becoming an Australian resident

- the first element of the cost base or reduced cost base of the investments is the market value of the investments at the time you became an Australian resident, and

- you may reduce the capital proceeds received upon the disposal of the investments by so much of any Foreign Investment Fund (FIF) attribution surplus relating to the investments as does not exceed the capital proceeds.

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