Edited version of your written advice

Authorisation Number: 1012988368296

Date of advice: 22 March 2016

Ruling

Subject: Foreign income - Retirement Account (RA)

Question and answer

Are any withdrawals from your Retirement Account fund included in your assessable income?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2017

The scheme commenced on:

1 July 2016

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 for taxation purposes.

You have a retirement account overseas.

You will withdraw money from this account.

Relevant legislative provisions:

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 paragraph 99B(2)(a)

Income Tax Assessment Act 1936 subsection 481(3)

Income Tax Assessment Act 1997 section 6-10

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

Income Tax Assessment Act 1997 section10-5

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Schedule 1 Article 18

Reasons for decision

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

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country y agreement is listed in section 5 of the Agreements Act.

The agreement between Australia and Country y operates to avoid the double taxation of income received by residents of Australia and Country Y.

The Article that is relevant to your situation is Article XX which deals with income not expressly mentioned.

Article XX says:

(1) Items of income of a resident of one of the Contracting States which are not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that State.

(2) However, if such income is derived by a resident of one of the Contracting States from sources in the other Contracting State, such income may also be taxed in the State in which it has its source.

This means that the withdrawn amounts from the retirement account is taxable in Australia and may be taxed also in Country Y.

A foreign trust is defined in subsection 481(3) of the Income Tax Assessment Act 1936 (ITAA 1936) as a trust which is not an Australian trust, and which did not result from a will or an intestacy in relation to the estate of a deceased person.

You have a retirement account in Country Y.

The account is a personal savings plan that gives you tax advantages for setting aside money for retirement.

This account is set up for the exclusive benefit of you or your beneficiaries.

The account is not a superannuation fund for the purposes of the ITAA 1997 and the ITAA 1936 as it allows for withdrawals for pre-retirement purposes.  Therefore the account is not established solely for the provision of retirement benefits.

The account is a foreign trust as defined in subsection 481(3) of the ITAA 1936 and is therefore a foreign investment fund (FIF).

Repeal of FIF measures

On 14 July 2010, the FIF measures were repealed and do not apply from the 2010-11 income year onwards.

If you have an interest in a FIF, you will be subject to the general tax rules applicable to your circumstances - for example, the general tax rules relating to trust income.

Assessability of trust income

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.

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.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, the amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents either:

• the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)

• amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and

• amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936).

Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).

Therefore, only income accumulated in the Fund over the years that is normally taxable in Australia and had not been previously subjected to tax in Australia would be assessable to the taxpayer under subsection 99B(1) of the ITAA 1936. For example, if the amounts in the Fund were amounts paid in by the taxpayer and interest earned over the years, all of the interest would be assessable when received by the taxpayer, but not the taxpayer's contributions.

You intend on withdrawing amounts from the account, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from your RA account are assessable under subsection 99B(1) of the ITAA 1936.

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 x 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.

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