Edited version of your private ruling

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Ruling

Subject: Adoption of foreign income year basis for returning foreign income

Question:

Will the Commissioner allow you to return foreign sourced income on the relevant foreign income year on your Australian income tax return?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on:

1 July 2011

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 a resident of Australia.

Your tax returns are prepared by a tax agent.

You receive distributions from a foreign trust and a controlled foreign company (CFC).

Your tax agent has difficulty obtaining information relating to your CFC income in a timely manner in order to prepare your Australian tax returns by your due date. This is due to the information not being available to finalise as a result of regulatory and reporting requirements imposed by the relevant foreign authorities.

The CFC from which you derive assessable income primarily invests in passive listed investments that are accounted for on a different tax year basis than Australia.

It is only some weeks following the foreign tax year end that foreign funds and companies make available end of year tax statements to the investors.

Your foreign advisors then need time to collate and report that information to your Australian tax agents who then need time to convert that information to Australian dollars and contemplate the relevant Australian tax implications.

Your arguments and references

You state that the need to disclose your foreign income on a 30 June year end basis considerably lengthens the time required to prepare your Australian tax return as it involves:

Dissecting foreign income from the foreign tax year to determine the income that relates to the Australian financial year. This involves arbitrary allocation and may not always reflect the true pattern in which you derived your assessable income once adjusted for a 30 June year end.

Waiting on the foreign advisors to provide information with regard to the foreign income for the Australian financial year. Following the receipt of this information (which is always after the foreign tax year of the following income year), you need to review it and contemplate the Australian income tax implications in order to accurately reflect the information on your Australian tax return. As mentioned above, this involves arbitrary allocation and may not reflect the true pattern in which you derived your assessable income once adjusted for a 30 June year end.

This process significantly affects your ability to lodge your Australian tax returns in a timely manner and has caused failure to lodge penalties being imposed on your income tax account in past years.

You quote the following taxation ruling:

Taxation ruling IT 2498 Income Tax: foreign tax credit system: currency translation of foreign income: trading stock and depreciable plant: basis of returning foreign income: capital gains/losses

Paragraph 38

…it has also been recognised in the past that where an individual taxpayer's foreign source accounts have been prepared on a basis other than the year ended 30 June, difficulty can be experienced in dissecting the income for the purposes of returning on a strict Australian income year basis. For reasons of practical administration it has therefore been accepted in the past that the foreign source income may be shown by the taxpayer in his or her Australian return on the relevant foreign income year basis. …

Paragraph 39

… individual taxpayers who are required to prepare foreign source income accounts on a basis other than a year ending on 30 June and who can demonstrate difficulties in dissecting the income/expenses for the purposes of returning on a strict Australian income year basis in relation to a year of income may be permitted to return the foreign source income in his or her Australian return for that year of income on the relevant foreign income year basis. …

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

The general rule is that for income tax purposes an individual taxpayer will be required to disclose in his or her Australian tax return the amount of foreign income derived during the Australian financial year.

It has been recognised in the past that where an individual taxpayer's foreign source accounts have been prepared on a basis other than the year ended 30 June, difficulty can be experienced in dissecting the income for the purposes of returning on a strict Australian income year basis.

The Commissioner has issued Taxation Ruling IT 2498 Income Tax: foreign tax credit system: currency translation of foreign income: trading stock and depreciable plant: basis of returning foreign income: capital gains/losses which addresses the issue of foreign income and expenses to be returned for an Australian year of income where foreign accounts and/or tax apply on a different basis.

Specifically, paragraph 39 of IT 2498 states:

… individual taxpayers who are required to prepare foreign source income accounts on a basis other than a year ending 30 June and who can demonstrate difficulties in dissecting the income/expenses for the purposes of returning on a strict Australian income year basis in relation to a year of income, may be permitted to return the foreign source income in his or her Australian return for that year of income on the relevant foreign income year basis. …

You are in receipt of foreign source income from a foreign trust and a controlled foreign company (CFC) both of which have a different tax year than Australia. As a result of regulatory and reporting requirements imposed by the relevant foreign tax authorities you face significant difficulty in obtaining information in relation to the foreign income within a suitable timeframe to include in your Australian tax return by your lodgement due date.

Conclusion

From the information provided the Commissioner accepts that your circumstances fall within those as outlined in IT 2498 and will allow you to return the foreign sourced income on the relevant foreign income year on your Australian tax return.

If the difficulties which have warranted you being allowed to return foreign income on the foreign income year basis cease to exist, you will be required to return the foreign sourced income on the Australian year of income basis.

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