Edited version of private ruling

Authorisation Number: 1011604107634

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Ruling

Subject: Distribution from a foreign pension fund

Is that part of the distribution received that is attributable to your interest in the increase in value of the deceased's Plan account balance that accrued during the 2008-09 income year assessable to you under Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes.

This ruling applies for the following period:

Income year ended 30 June 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for income tax purposes.

Your relative passed away in mid 2008.

You inherited a sum of money from your late relative's overseas retirement fund during the 2008-09 income year.

The total amount paid to you was $X. Of this amount, $Y represented your interest in the deceased's vested Plan account balance as at the date of death with the remaining $X-Y representing your interest in the increase in value of the deceased's Plan account balance subsequent to the date of death.

Foreign withholding tax was withheld from the payments made to you.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 6-10(4)

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

Income Tax Assessment Act 1936 Subsection 97(1)

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Subsection 99B

Income Tax Assessment Act 1997 Subsection 960-50(6)

Reasons for decision

Distribution from the Plan

The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)).

'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). 

It is considered that the Plan is a trust as there is a trustee or custodian who holds the trust property and is obligated to deal with the trust property for the benefit of one or more beneficiaries.

The taxation of trust income is dealt with under Division 6 of Part III of the ITAA 1936.

Where a beneficiary is presently entitled to a share of the income of a trust, the assessable income of the beneficiary will include under subsection 97(1) of the ITAA 1936 the corresponding share of the net income of the trust. The net income of the trust is calculated under section 95 of the ITAA 1936 and, broadly, is the amount that would be the trust's taxable income for the year if it were a resident.

You were paid an amount during the 2008-09 income year that included your interest in the increase in value of the deceased's Plan account balance since the beginning of that income year. As all or some part of this increase in value would have resulted from income derived by the trust, it is considered that you were presently entitled to an amount of trust income for the income year.

As a result, you will be assessed under subsection 97(1) of the ITAA 1936 on all, or some part of, the section 95 net income of the trust for the income year. However, it is not possible to ascertain the precise amount on which you will be assessable under subsection 97(1) of the ITAA 1936 as there is insufficient information available to calculate either the income of the trust or the section 95 net income.

But to the extent that your interest in the increase in value of the deceased's Plan account balance since the beginning of the income year is not assessable to you under subsection 97(1) of the ITAA 1936, the amount will be assessable to you under section 99B of the ITAA 1936. Broadly, section 99B of the ITAA 1936 applies to include certain trust distributions in the assessable income of a beneficiary to the extent they have not previously been subject to tax. The trust distributions that fall within section 99B of the ITAA 1936 are those that are sourced from a class of trust income which is taxable in Australia.

In this case, it is reasonable to conclude that the part of the distribution received by you from the Plan that is attributable to your interest in the increase in value of the deceased's Plan account balance during the 2008-09 income year would be sourced from a class of trust income which is taxable in Australia. As a result, that part of the distribution would be assessable to you under section 99B of the ITAA 1936 in the event that the amount is not otherwise assessable to you under subsection 97(1) of the ITAA 1936.

Your interest in the total increase in value of the deceased's Plan account balance subsequent to the date of death is $X-Y. Accordingly so much of this amount as accrued to the Plan during the 2008-09 income year will be assessable to you in that income year under Division 6 of Part III to the ITAA 1936. Under item 7 in the table in subsection 960-50(6) of the ITAA 1997, the amount assessable would be translated to Australian currency at the exchange rate applicable at the time of receipt of the distribution.

Note:

If there is insufficient information to ascertain how much of the total increase accrued to the Plan during the 2008-09 income year, the Commissioner will accept an apportionment of this amount on a reasonable basis in order to facilitate practical compliance. An apportionment of this amount on an equal basis across the total number of days in the period beginning at the date of death and ending at the date the distribution was made would be considered reasonable by the Commissioner.

Foreign Income Tax offset (FITO)

Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

Foreign income tax is a tax imposed by a law other than an Australian law, on income profits or gains (subsection 770-15(1) of the ITAA 1997). The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

However, section 770-140 of the ITAA 1997 will deemed a taxpayer not to have paid foreign income tax to the extent that they or any other associated entity become entitled to a refund of the foreign income tax .

When claiming a FITO, the taxpayer is required to 'gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income.

Furthermore, if only part of the an amount on which foreign tax has been paid is included in Australian assessable income, only that proportion of the foreign income tax which equates to the proportion of foreign income included would be available as a tax offset.

The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997).

The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source.

The taxpayer does not need to calculate the foreign tax offset cap if they elect to use the $1,000 de minimis cap. However, they cannot claim more than $1000 of the foreign income tax paid in the income year if they do not calculate the de minimis cap.

If claiming a foreign income tax offset of more than $1000, they will first need to work out the foreign income tax offset limit. This amount is based on a comparison between the tax liability and the tax liability they would have if certain foreign-taxed and foreign sourced income and related deductions were disregarded (subsection 770-75(2) of the ITAA 1997).

If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap.

More information on FITO is available at the Tax office website in a document called Guide to foreign income tax offset rules 2009-10 (NAT 72923).

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