Edited version of your private ruling

Authorisation Number: 1012603147420

Ruling

Subject: Foreign trust income

Question 1

After 201X, are the amounts of growth in your fund, brought into Australia, assessable income under section 97 of the Income Tax Assessment Act 1936 and declarable on your income tax return?

Answer 1

Yes

Question 2

Before 201X, are the amounts of growth in your fund, brought into Australia, assessable income under section 99B of the Income Tax Assessment Act 1936 and declarable on your income tax return?

Answer 2

Yes

Question 3

Are amounts contributed by you and your employer to your fund, brought into Australia, assessable income under section 99B of the Income Tax Assessment Act 1936 and declarable on your income tax return?

Answer 3

No

This ruling applies for the following period:

Year ended 30 June 2014.

The scheme commenced on: 1 July 2013.

Relevant facts:

You contributed to the Overseas Fund until you ceased employment in 200X to migrate to Australia.

You became an Australian citizen in 201X.

You travelled overseas for your overseas citizenship renunciation.

You will apply to withdraw funds from your fund, which will be deposited into your Australian bank account before mid 201X.

In addition to withdrawing benefits for retirement purposes, members can also withdraw benefits for the other specific purposes.

Assumptions:

N/A

Relevant legislative provisions:

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

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

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 97(1)

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1936 Section 99B(1)

Income Tax Assessment Act 1936 Section 99B(2)

Reasons for decision

Trust Income

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 (subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 [ITAA 1997]).

The taxation of trusts other than superannuation funds is governed by Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936), which outlines circumstances under which the beneficiary or trustee will be assessed.

Section 97 of the ITAA 1936 applies to include in the assessable income of a beneficiary of a trust estate, who is not under a legal disability and is presently entitled to a share of the income of a trust estate, their share of the net income of the trust estate.

The term 'legal disability', which is not defined in the ITAA 1936 or the ITAA 1997, refers to a person who is unable to give a trustee an immediate discharge in respect of a distribution of trust income. Examples of persons who are under a legal disability are minors and bankrupts.

The term 'present entitlement' is also not defined in the ITAA 1936 or the ITAA 1997. In Harmer v. FC of T (1991) 173 CLR 264 (Harmer), the High Court provided the view that a beneficiary is presently entitled to a share of trust income if both:

(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and

(b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.

In your case, you and your previous employer were contributing to the fund, a foreign structure used as an investment trust for the purposes of providing benefits to its members.

Certain criteria must be met in order to access funds. You will able to access your previous contributions and any interest/return on these funds when you have Australian citizenship and renounce your overseas citizenship.

Growth in the fund after 201X

Subsection 97(1) of the ITAA 1936 applies in your case to any growth in the fund from 201X until the fund was redeemed, as you are a resident beneficiary who is not under a legal disability and who will be presently entitled to income. Under this provision, you are required to include in your assessable income your share of trust net income being the growth in the period.

Growth in the fund before 201X

Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the ITAA 1936.

The amount you receive from your fund represents trust income of a class which is taxable in Australia, but which has not previously been subject to Australian tax in the hands of either the beneficiary or the trustee

Under subsection 99B(1) of the ITAA 1936, a beneficiary who is a resident of Australia at any time during the income year and who receives any amount from a trust estate (whether paid or applied for their benefit), is taxed on that amount unless an exclusion applies:

Subsection 99B(2) of the ITAA 1936 reduces the amount included in subsection 99B(1) in certain circumstances. Under paragraph 99B(2)(a) of the ITAA 1936 so much of the amount as represents corpus of the trust is excluded.

In your case, subsection 99B(1) of the ITAA 1936 will apply to include the amount which you received from your fund as assessable income as you received the payment from a fund which is a trust for income tax purposes.

However, part of the amount you received upon closing the fund represents corpus of the trust. This includes contributions made by you and any contributions made by your employer. Thus the amount of assessable income under subsection 99B(1) of the ITAA 1936 is reduced by your contributions and your employer's contributions.

The amount you were paid from your fund which represents growth in the fund before 201X is therefore assessable income to you in Australia under subsection 99B(1) of the ITAA 1936, as it would have been assessable had it been derived by a resident taxpayer (ATO ID 2011/93).

Contributions

Amounts contributed by you and your employer to the fund are not amounts of ordinary or statutory income. They are not assessable income. These amounts cannot form part of the assessable income of the trust; they are capital amounts and will form part of the corpus of the trust.

In addition, these contributions were made when you were a non-resident of Australia and as such are not made assessable under section 99B Division 6 of the ITAA 1936.

The contributions are therefore not taxable in Australia when subsequently withdrawn by you.

Further issues for you to consider:

Interest charge on distributions of accumulated trust income

An Australian resident may be liable to interest under the Taxation (Interest on Non-resident Trust Distributions) Act 1990, where their assessable income includes an amount from non-resident trust assessed under section 99B of the ITAA 1936.

Subsection 102AAM(1) of the ITAA 1936 may make a taxpayer liable to pay interest to the Commissioner, on distributions from certain non-resident trust estates.

The interest is calculated on the following amount:

(distributed amount × applicable rate of tax) - FTC

· "Distributed amount" is the amount included in assessable income of the taxpayer under section 99B of the ITAA 1936 and grossed up by any foreign tax in respect of the distribution.

· "Applicable rate of tax" is maximum rate of tax payable by the taxpayer.\

· "FTC" is the foreign tax credit which is attributable to the amount of the distribution included in the taxpayer's assessable income.

The rate of interest is the GIC rate fixed under Section 8AAD of the Taxation Administration Act 1953 less seven percentage points.

The GIC is updated quarterly (refer examples in table below):

See the ATO website for current GIC rates applicable to your circumstances.

Interest charges in relation to unlisted counties are reduced by amounts of tax paid in listed countries.

Section 320 of the ITAA 1936 defines a listed country as "a foreign country, or a part of a foreign country, that is declared by the regulations to be a listed country for the purposes of this Part."

And defines an unlisted country as:

(a) a foreign country that does not (either in whole or in part) consist of a listed country or listed countries; or

(b) if one or more parts of a foreign country are listed countries - the remainder of that foreign country.

Listed countries are found in Schedule 10 of the Income Tax Regulations 1936:

Example:

For example in the current year, an Australian resident receives an amount from a foreign trust (in an unlisted country) of $50,000. The $50,000 distribution was made out of foreign income derived by the trust in a prior year. The distribution is included in the taxpayer's assessable income by virtue of section 99B of the ITAA 1936. The

$5,000 of the foreign tax was attributable to the distribution of $50,000. The applicable rate of tax for this taxpayer is 45%, therefore interest will be payable on the following amount:

(distributed amount × applicable rate of tax) - FTC

($50,000 + $5,000) x 45% - $5,000 = $19,750

Interest is then calculated on this amount for the relevant period 99B of the ITAA 1936 applies using the GIC daily rate less 7 percentage points.

Foreign Tax Credits/Foreign Income Tax Offset

Australia has a double tax agreement (DTA) with the applicable overseas country. The Convention operates to avoid the double taxation of income received by Australian and the relevant overseas residents.

An article of the Convention provides for relief from double taxation. Accordingly, you may be entitled to a foreign income tax offset in respect of any foreign tax paid overseas.

To be entitled to a foreign income tax offset (FITO):

· you must have actually paid, or be deemed to have paid, an amount of foreign income tax,

· the income or gain on which you paid foreign income tax must be included in his assessable income for Australian income tax purposes.

See our website www.ato.gov.au for information on calculating your FITO.

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