Edited version of your written advice

Authorisation Number: 1013068034590

Date of advice: 9 August 2016

Ruling

Subject: Foreign Income Tax Offset (FITO)

Question 1:

Is a distribution in the X income year, comprised of Country Y sourced retained profits ('the distribution') derived over several years, by the Y Trust to the Z Trust included in the net income of the Z Trust in respect of the X income year for the purposes of subsection 95(1) of the Income Tax assessment Act 1936 (ITAA 1936)?

Answer:

Yes. The distribution is assessable income of the Z Trust in respect of the X income year pursuant to section 99B of the ITAA 1936, and is therefore included in the net income of the Z Trust in respect of the X income year for the purposes of subsection 95(1) of the ITAA 1936.

Question 2:

Is the trustee of the Z Trust assessable in the X income year, pursuant to section 99 or 99A of the ITAA 1936, in respect of the distribution if no beneficiary is made presently entitled to the distribution in the X income year?

Answer:

Yes. The trustee of the Z Trust is assessable in the X income year, pursuant to section 99A of the ITAA 1936, in respect of the distribution if no beneficiary is made presently entitled to the distribution on or before 30 June of the X income year.

Question 3:

If the answer to Question 2 is in the affirmative, is the Z Trust entitled to a foreign income tax offset in respect of the X income year, pursuant to subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997), for Country Y income tax paid by the Y Trust in each of the earlier income years being A, B, C and D income years in respect of the distribution?

Answer:

Yes. The Z Trust is entitled to a foreign income tax offset ('offset') in respect of the X income year, pursuant to subsection 770-10(1) of the ITAA 1997, for Country Y income tax paid by the Y Trust in respect of the distribution in each of the A, B, C and D income years referable to the amount of income derived by the Y Trust in the A, B, C and D income years and included in the assessable income of the Z Trust.

Further, the amount of the offset that can be claimed for each of the years concerned is subject to the limit imposed by section 770-75 of the ITAA 1997.

Relevant facts:

The Z Trust

The Z Trust is an Australian discretionary trust.

The Z Trust deed

Beneficiaries

Among others:

E is a Beneficiary

Any company in which E holds interests, is also a Beneficiary

Trust Fund

The settled sum, paid by the Settlor to the trustee and all moneys, investments and property paid or transferred to and accepted by the trustee as additions to the Trust Fund.

Trustee's Powers

The Z Trust deed sets out the powers and discretions of the trustee which may be exercised by the trustee at any time in the trustee's absolute and uncontrolled discretion. In essence, those powers enable the trustee to pay, at any time, any beneficiary, any part of the Trust Fund, or apply to the benefit of any beneficiary, the moneys of the Trust Fund, as the trustee shall think fit.

Source of Income

The Z Trust does not trade and only receives various forms of investment income.

The Y Trust

The Y Trust is a related discretionary trust of the Z Trust.

The Y Trust is a resident of Country Y for Country Y income tax purposes.

Country Y is a listed country for the purposes of subsection 102AAE(1) of the ITAA 1997.

The directors of the Y Trust are all Australian residents.

The Y Trust is a non-resident trust estate for Australian income tax purposes.

The Y Trust deed

Beneficiaries

Among others:

E is a Beneficiary

Any trust in which E is a beneficiary, is also a Beneficiary

Any company in which E holds shares, is also a Beneficiary

Trust Fund

All property which may in the future be received or acquired by the trustee from any source, and the income from such property.

Powers and discretions of Trustee

The trust deed confers upon the trustee, the powers, among others, to deal with the Trust Fund as if the trustee were the absolute owner of and beneficially entitled to the Trust Fund. The Trustee has discretion to make any payment, transfer, application, resettlement or final distribution of all or any part of the Trust Fund to any one or more of the Beneficiaries.

Source of income

The Y Trust carries on leasing operations in Country Y.

A copy of the return of income for the Y Trust in respect of the A, B, C and D income years provide that the trust derived income from leasing and rental, interest income and other income representing recovery of expenses.

The Y Trust derives only Country Y sourced income.

The Y Trust has not derived income that is 'eligible designated concession income' in relation to Country Y in respect of the income years, prior to the X income year, under consideration ('prior years').

Income derived by the Y Trust in the prior years was not distributed to its beneficiaries. This has resulted in the Y Trust having substantial accumulated profits.

The Y Trust does not:

• hold any property in Australia

• carry on business in Australia

• derive Australian sourced income

• have a permanent establishment in Australia

Distribution of retained profits

The Y Trust has paid Country Y income taxes in respect of all its income derived in the prior years.

The Trustee for the Y Trust is proposing to make the Z Trust presently entitled to some of its accumulated profits ('the distribution') in the X income year.

The Y Trust has paid trustee tax in Country Y on the distribution made to the Z Trust.

The Trustee for the Z Trust does not propose to make any beneficiary presently entitled, in respect of the X income year, to the distribution received from the Y Trust.

There is documentary evidence of details of the Country Y sourced income derived by the Y Trust for the A, B, C and D income years and trustee tax paid by the Y trust in Country Y in respect of the distribution relating to the A, B, C and D income years.

Also, there is documentary evidence of details of taxes assessed by the relevant Country Y Revenue Authority in respect of the Y Trust and date/s of payment of those taxes for each of the A, B, C and D income years.

This ruling is limited to determining whether:

• the accumulated profits distributed by the Y Trust to the Z Trust in the X income year is subject to Australian income tax pursuant to section 99B of the ITAA 1936; and

• the Y Trust is entitled to a foreign income tax offset in the X income year for Country Y income taxes paid in each of the A, B, C and D income years in respect of the portion of the distribution derived by the Y Trust in the A, B, C and D income years.

In considering the application of section 99B, it is assumed that the Transferor Trust provisions have no application to the present circumstances.

Relevant Legislative Provisions:

Income tax Assessment Act 1936: section 6B

Income tax Assessment Act 1936: paragraph 6B(1A)(b)

Income tax Assessment Act 1936: subparagraph 6B(2A)(a)(ii)

Income tax Assessment Act 1936: subparagraph 6B(2A)(b)

Income tax Assessment Act 1936: section 95 (1)

Income tax Assessment Act 1936: section 95 (2)

Income tax Assessment Act 1936: section 97Income tax Assessment Act 1936: section 99A

Income tax Assessment Act 1936: section 99(2A)

Income tax Assessment Act 1936: section 99(4A)

Income tax Assessment Act 1936: subsection 99B(1)

Income tax Assessment Act 1936: subsection 99B(2)

Income tax Assessment Act 1936: subsection102AAE

Income tax Assessment Act 1936: subsection 102AAM

Income tax Assessment Act 1997: subsection 770-10(1)

Income tax Assessment Act 1997: section 770-15

Income tax Assessment Act 1997: section 770-130

Income tax Assessment Act 1997: subsection 770-130(3)

Convention between Australia and Country Y for the avoidance of double taxation with respect to taxes on income and fringe benefits and the prevention of fiscal evasion ('the Country Y Convention').

Country Y Convention: Article enabling relief from double taxation

Reasons for decision

While these reasons are not part of the private ruling, we provide them to understand how we reached our decision.

Question 1

Summary

It is considered that none of the exclusions in subsection 99B(2) of the ITAA 1936 apply to reduce the proposed distribution by the Y Trust to the Z Trust in the X income year.

Accordingly, section 99B(1) of the ITAA 1936 will apply to bring the distribution entirely to form part of the assessable income of the Z Trust and in turn the net income of the Z Trust under section 95(1) of the ITAA 1936 in respect of the X income year.

It is considered that there is no interest charge payable under subsection 102AAM (5) of the ITAA 1936 in respect of the distribution included in the assessable income of the Z trust pursuant to subsection 99B(1).

This is due to the fact that for the purposes of subsection 102AAE(1) of the ITAA 1936, the Y Trust is a listed country trust estate. In this regard, no part of the distribution represents 'eligible designated concession income', being income in the nature of designated concession income derived by the Y Trust from sources in Country Y that is not subject to tax in Country Y.

Detailed Explanation

Income of a trust estate

Division 6 of Part III of the ITAA 1936 entitled 'Division 6- Trust Income' contains the basic provisions of the income tax law that deal with the taxation of trustees and beneficiaries in respect of trust estates. Section 95 defines, for the purposes of Division 6, among others, various terms in relation to the income of a trust as follows:

Net Income

The term 'net income', in relation to a trust, is defined in subsection 95(1) to mean:

'the total assessable income of the trust estate as calculated under the ITAA 1936 as if the trustee were a taxpayer in respect of that income and was a resident, less all allowable deductions...'

Section 95 defines the circumstances in which a trust is to be taken to be 'a resident trust' for the purposes of Division 6. Pursuant to subsection 95(2) of the ITAA 1936, a trust is a resident trust in relation to a year of income for the purposes of Division 6 if:

(a) 'the trustee of the trust estate was a resident at any time during the year of income; or

(b) the central management and control of the trust estate was in Australia at any time during the year of income'.

Residency of a corporate trustee

The definition of 'resident' in subsection 6(1) of the ITAA 1936 provides that a company that is incorporated in Australia is a resident for Australian income tax purposes.

Assessable income

The combined effect of subsection 95(1) and 95(2) is that the net income of a resident trust estate will include the assessable income of the trust in the nature of ordinary or statutory income, pursuant to sections 6-5(2) and 6-10(4) of the ITAA 1997 respectively, derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Taxation of net income of a resident trust

Broadly, under Division 6, the net income of a resident trust estate is assessed as follows:

• Where a resident beneficiary who is not under a legal disability is presently entitled to any income of the trust, that income is assessable to the beneficiary pursuant to section 97 of the ITAA 1936;

• Where a resident beneficiary is under a legal disability, the trust income to which the beneficiary is presently entitled is assessed to the trustee on the beneficiary's behalf by virtue of section 98 of the ITAA 1936; and

• Where the trust derived income to which no beneficiary is presently entitled so much of that income to which no beneficiary is presently entitled is taxed to the trustee under sections 99 or 99A as appropriate.

Accumulated income not previously subject to Australian tax

Included in the list of provisions contained in section 10-5 of the ITAA 1997 dealing with statutory income, is section 99B of the ITAA 1936.

Section 99B of the ITAA 1936 requires the inclusion in a resident beneficiary's assessable income of amounts paid to a resident beneficiary where that amount represents trust income of a class which is taxable in Australia but which has not previously been subject to Australian tax.

Sub-section (1) of section 99B, which is subject to a number of qualifications expressed in sub-section (2), sets out the basic rule 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 estate or has an amount of trust property applied for the beneficiary's benefit, that amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936, broadly, reduces the amount included in the assessable income of a beneficiary to the extent that it represents:

• corpus of the trust estate - but not an amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer;

• an amount that would not have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer;

• an amount that is non-assessable non-exempt income of the beneficiary as conduit foreign income under section 802-17 of the ITAA 1997

• an amount that is or has been included in the assessable income of the beneficiary under section 97 of the ITAA 1936;

• an amount that has been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936; or

• an amount that has been included in the assessable income of a taxpayer under section 102AAZD of the ITAA 1936 ('transferor trust provisions').

Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary.

Section 99B may apply in certain circumstances, where an amount representing foreign-source income of a trust estate is paid to, or applied for the benefit of, a beneficiary.

In the CCH Federal Tax Reporter commentary in 51-120 entitled 'receipt of trust income not previously subject to tax' it is explained that one of the circumstances is where a trust estate that is not a resident trust estate derives foreign source income and there is no beneficiary presently entitled to that income. In this situation, so much of the net income as represents the foreign source income would not be assessable, when it is derived, in terms of section 97 to 99A to either the beneficiary or the trustee (unless the income is subject to accruals taxation under Division 6AAA of the ITAA 1936).

If the foreign-source income is paid to, or applied for the benefit of, a beneficiary, the beneficiary would be assessable on it under section 99B if the beneficiary is a resident at any time during the year in which the payment or application occurs, provided that the exclusions in section 99B(2)(b) did not apply.

Net income of the Z Trust

In determining the net income of the Z Trust, an Australian resident trust, in respect of the X income year under subsection 95(1) of the ITAA 1936, the assessable income of the Z Trust will include all ordinary and statutory income sourced in and out of Australia.

Foreign sourced distribution

The Z Trust is a Beneficiary of the Y Trust pursuant to the Y Trust deed.

The Y Trust is a Country Y resident discretionary trust. The trust deed confers on the trustee, among others, the powers to 'deal with the Trust Fund as if the Trustee were the absolute owner of and beneficially entitled to the Trust Fund and to make any payment, transfer, application, resettlement or final distribution of all or any part of the Trust Fund to any one or more of the Beneficiaries.

'Trust Fund' is defined in the trust deed as all property which may in the future be received or acquired by the Trustee from any source and the money and investments from time to time representing such property and, the income from such property.'

The trustee for the Y Trust is proposing to make the Z Trust presently entitled to and distribute in the X income year some of its profits accumulated over several financial years prior to the X income year. These profits represent predominantly Country Y sourced leasing income, rental income and minor amounts of interest of the Y Trust.

The accumulated profits of the Y Trust would constitute 'Trust Funds' under the terms of the trust deed, as previously defined. Further, a distribution of an amount of the accumulated profits to the Z Trust is consistent with the powers conferred on the trustee for the Y Trust under the trust deed.

When the distribution is made, the conditions in subsection 99B(1) of the ITAA 1936 are satisfied in the first instance as the Z Trust has received from the Y Trust an amount of trust property during an income year in which the Z Trust is a resident beneficiary of the Y Trust.

The conditions in subsection 99B(2) of the ITAA 1936 which apply to reduce the amount of the distribution to be included in the assessable income of the Z Trust, are considered as follows:

• the distribution, or any part of the distribution, does not represent corpus of any trust estate, as it is attributable in its entirety to the country Y sourced leasing and rental income and interest derived by the Y Trust;

• leasing and rental income and interest would be assessable income for Australian income tax purposes had it been derived by a resident taxpayer;

• the distribution is not non-assessable non-exempt income of the beneficiary under any provision including section 802-17 of the ITAA 1997

As detailed elsewhere in this report, the trustee for the Y Trust, a discretionary trust, has absolute discretion in dealing with the Trust Funds under the trust deed The trustee did not make any of its beneficiaries presently entitled to a distribution of the leasing profits and other income derived by the Y Trust during the income years prior to the X income year.

Accordingly, in terms of the resident beneficiaries of the trust, the distribution of the accumulated profits in the X income year cannot represent:

• an amount that is or has been previously included in the assessable income of any beneficiary of the Z Trust under section 97 of the ITAA 1936; or

• an amount that is or has been previously included in the assessable income of the Z Trust or any trustee of a trust under sections 98, 99 or 99A of the ITAA 1936.

Further, the distribution, or any part of it, will not represent an amount that has been included in the assessable income of a taxpayer, i.e. subject to accruals taxation, under the transferor trust provisions in Division 6AAA of Part III of the ITAA 1936.

In conclusion, as none of the exclusions in subsection 99B(2) of the ITAA 1936 apply to reduce the distribution, section 99B(1) of the ITAA 1936 will apply to bring the distribution entirely to form part of the assessable income of the Z Trust and in turn the net income of the Z Trust under section 95(1) of the ITAA 1936 in respect of the X income year.

Payment of interest by a taxpayer on distributions assessed under section 99B

Section 102AAM of the ITAA 1936 sets out the circumstances in which an additional tax, in the nature of an interest charge, applies to amounts that are included in the assessable income of a beneficiary under section 99B. Sections 102AAM (1), (2) and (3) are designed to identify those distributions from a non-resident trust estate that will attract the interest charge.

To the extent presently relevant, section 102AAM provides, in essence that, if:

• an amount is included in the assessable income of a taxpayer ('original taxpayer') of a year of income, being the year of income commencing on 1 July 1990 or a subsequent year of income, under section 99B, in relation to a non-resident trust ('distributed amount')(subsection 1);

• the whole or a part of the distributed amount is attributable to eligible designated concession income of any listed country trust estate in respect of the non-resident trust's year of income (subsection 1); and

• the original taxpayer is the trustee of a trust estate who is liable to be assessed and pay tax under section 98,99 or 99A in respect of the distributed amount (subsection 3),the original taxpayer is liable to pay an interest charge, on the distributed amount that represents eligible designated concession income, as calculated under subsection 102AAM(5).

Listed country trust estate

Subsection 102AAE(1) of the ITAA 1936 provides at paragraph (a) that, among others, a trust estate is to be taken to be a listed country trust estate in relation to a year of income if:

• all of the income of that trust estate is subject to tax in a listed country in a tax accounting period of the trust estate that ends before the end of the year of income or commences during the year of income; or

• is designated concession income in relation to any listed country.

Designated concession income

Income or profits are designated concession income only if:

• they are of a kind specified in the Income Tax Regulations 1936 in relation to a particular listed country, and

• they are derived by an entity that is of a type specified in the Income Tax Regulations 1936.

Regulation 17 of the Income Tax Assessment (1936 Act) Regulation 2015 sets out the item of designated concession income in relation to the seven listed countries.

The Y Trust is a resident of Country Y for income tax purposes. The Y Trust derives income from Country Y sources only. All of its Country Y sourced income in respect of each of the income years prior to the X income year has been subject to Country Y income taxes.

Additionally, the Y Trust has not derived income in the nature of designated concession income in relation to Country Y in any of the income years under consideration.

Consequently, for the purposes of paragraph 102AAE(1)(a), firstly, the Y Trust is a listed country trust estate in respect of all the income years under consideration. Secondly, the Y Trust has not derived designated concession income that is not subject to tax in Country Y ('eligible designated concession income') in the income years in question.

Accordingly, although for the purposes of subsection 102AAM(3) the trustee of the Z Trust, the original taxpayer, is assessable under section 99A ( as explained in the response to Question 2) in respect of the whole of the distributed amount there is no interest charge payable under subsection 102AAM (5) as no part of the distributed amount represents designated concession income derived from sources in Country Y that is not subject to tax in Country Y (eligible designated concession income).

Question 2

Summary

The Z Trust is not a type of trust covered by subsection 99A(2) of the ITAA 1936.

Accordingly, where the trustee for the Z Trust does not make any of its beneficiaries presently entitled to a proposed distribution by the Y Trust which forms part of the net income of the Z Trust in respect of the 2017 income year, the trustee is liable to tax in respect of that distribution pursuant to subsection 99A (4A) of the ITAA 1936.

The tax so imposed is worked out at the rate declared by the Parliament for the purposes of section 99A of the ITAA 1936.

Detailed explanation

Accumulating trust income

Sections 99 and 99A of the ITAA 1936 govern the taxation of so much of the net income of a trust estate in relation to a year of income to which there is no beneficiary presently entitled.

Income is taxed under section 99 at ordinary progressive individual rates of tax while section 99A imposes a deterrent rate of tax which is equal to the prevailing maximum individual rate of tax.

Section 99 will apply where section 99A does not apply in relation to a trust estate in respect of an income year.

Section 99A

Clause 13 of the Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No. 6) 1979 and the Income Tax (Rates) Amendment Bill (No.2) 1979 deals with the taxation of accumulating trust income. In essence, clause 13 provides that, trust income to which no beneficiary is presently entitled is generally subject to tax under section 99A unless, the Commissioner forms an opinion that, on the basis of guidelines contained in subsection 99A(3) and supplemented by subsection 99A(3A), it would be unreasonable for section 99A to apply.

The cases in which the Commissioner may conclude that it would be unreasonable for section 99A to apply are specifically listed in subsection 99A(2). Section 99A(2) gives the Commissioner discretion to assess the trustee pursuant to s 99, rather than section 99A, where the following kinds of trust estates are involved:

(1) a trust estate that resulted from a will, a codicil, an intestacy or a court order varying the provisions of a will, a codicil or the operation of the intestacy provisions;

(2) bankrupt estates, or

(3) trust estates that consist of property of a kind referred to in s 102AG(2)(c).

The circumstances surrounding the application of section 99A was clarified in Duggan & Ryall v FC of T 72 ATC 4239; (1972) 129 CLR 365. In discussing the jurisdiction of a court with regard to an appeal against an assessment under section 99A, Stephen J said that the only occasion for intervention by the court would be if it appeared from the evidence that the Commissioner had failed in the duty, cast upon him by subsection 99A(2), properly to consider and come to a conclusion concerning the reasonableness or otherwise of the application of section 99A.

Accordingly, in situations not covered under section 99A(2), should the trustee not exercise its discretion to pay or apply certain income in favour of a particular beneficiary but to retain or accumulate that income within the trust, the trustee shall be assessed and liable to pay tax on the net income of the trust under subsection 99A(4) or 99A(4A) of the ITAA 1936.

Application of 99A

Relevantly, subsection 99A(4A) provides:

Where there is a part of the net income of a resident trust estate:

(a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97

(b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and

(c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

Trustee's Powers

The Z Trust deed confers extensive powers and discretion which may be exercised by the trustee at any time in the trustee's absolute and uncontrolled discretion. In essence, those powers enable the trustee for the Z Trust to pay, at any time, any beneficiary, any part of the Trust Fund, or apply to the benefit of any beneficiary, the moneys of the Trust Fund, as the trustee shall think fit.

In the present circumstances, the trustee of the Z Trust proposes to make no beneficiary presently entitled to the distribution received from the Y Trust. The distribution represents, in the main, Country Y sourced retained profits derived by the Y Trust from its leasing operations in respect of the income years prior to the X income year. The Z Trust is not a type of trust covered by subsection 99A(2).

Accordingly, the Commissioner is not required by section 99A to consider whether it would be unreasonable to apply the punitive rate imposed by section 99A in respect of the taxation of the distribution in the hands of the trustee of the Z Trust.

Pursuant to section 99B, the distribution from the Y Trust forms part of the net income of the Z Trust in respect of the X income year. The distribution, as determined elsewhere in this report, has not been previously subject to Australian income tax in respect of:

• any beneficiary of the Z Trust under section 97;or

• the trustee of the Z Trust under section 98; and

the distribution does not represent income to which a beneficiary is presently entitled that is attributable to a period when that beneficiary was not a resident and is also attributable to sources out of Australia.

In summary, where the trustee for the Z Trust does not make any of its beneficiaries presently entitled to a proposed distribution by the Y Trust which forms part of the net income of the Z Trust in respect of the 2017 income year, the trustee is liable to tax in respect of that distribution pursuant to subsection 99A (4A) of the ITAA 1936.

The tax so imposed is worked out at the rate declared by the Parliament for the purposes of section 99A of the ITAA 1936.

Question 3

Summary

The Article providing for double tax relief under the Country Y Convention requires that, subject to Australian law, credit shall be allowed against Australian income tax payable on income in respect of which Country Y taxes were paid under the law of Country Y and which were levied in accordance with the Country Y Convention.

The trustee for the Z Trust has indirectly paid Country Y income taxes, imposed under the Country Y tax law, in relation to the proposed distribution from the Y Trust in the X income year. Documentary evidence provided supports the payment of Country Y income taxes paid in respect of the distribution that is attributable to income derived by the Y Trust in the A, B, C and D income years. The distribution is assessable income of the Z Trust in respect of the X income year for Australian income tax purposes pursuant to section 99A of the ITAA 1936.

Accordingly, the trustee for the Z Trust satisfies the requirements of subsection 770-10(1) of the ITAA 1997 and is entitled to a foreign income tax offset in respect of the X income year for Country Y taxes paid on the portion of the distribution relating to income derived by the Y Trust in the A, B, C, and D income years.

The amount of the foreign income tax offset that the trustee for the Z Trust is entitled to in respect of each of the A, B, C and D income years is calculated in accordance with, section 770-75 of the ITAA 1997 which imposes a limit on the amount of the foreign income tax offset that can be claimed in each income year under consideration.

Detailed explanation

Foreign income tax offset

'Foreign income tax' is defined to include a tax on income that is imposed by a law other than an Australian law (section 770-15 of the ITAA 1997). It also includes tax that is correctly imposed by a law other than an Australian law that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

A foreign income tax offset is available to a taxpayer for 'foreign income tax paid' by the taxpayer in respect of an amount that is included in the taxpayer's assessable income for that year (subsection 770-10(1) of the ITAA 1997).

Income subject to foreign income tax

Where, in a year income, a trustee of a resident trust:

• receives a distribution of foreign sourced trust income; and

• no beneficiary of the resident trust is made presently entitled to that distribution,

the trustee of the resident trust is assessed, in the year of income concerned, in respect of that distribution, pursuant to section 99 or section 99A of the ITAA 1936 as appropriate. If foreign income taxes have been paid by the foreign trust in respect of the distribution, section 770-130 of the ITAA 1997 applies to treat the trustee of the resident trust as having paid those foreign income taxes.

Foreign income tax paid by the taxpayer - extended meaning

Section 770-130 of the ITAA 1997 applies to treat a taxpayer as having paid foreign income tax, in circumstances where the tax is actually paid by someone else.

Subsection 770-130(1) provides:

   770-130(1) This Act applies to you as if you had paid an amount of *foreign income tax in respect of an amount (a taxed amount) that is all or part of an amount included in your *ordinary income or *statutory income if you are covered by subsection (2) or (3) for an amount of foreign income tax paid in respect of the taxed amount.

Subsection 770-130(3) of the ITAA 1997 relevantly provides that a taxpayer is covered by this subsection for an amount of foreign income tax paid in respect of the taxed amount to the extent that:

(a) the taxed amount is taken, because of section 6B of the ITAA 1936, to be attributable to

another amount of income of a particular kind or source; and

(b) foreign income tax has been paid in respect of the other amount of income; and

(c) the taxed amount is less than it would have been if the foreign tax had not been paid.

The application of subsection 770-130(3) is considered as follows to determine whether the trustee of the Z Trust is entitled to a foreign income tax offset for Country Y income taxes paid by the Y Trust in respect of the Country Y sourced distribution.

In regards to the operation of subsection 6B in the previously stated paragraph 770-130(3)(a),

subsections 6B(1A) and 6B(2) of the ITAA 1936 deems income derived by, among others, a beneficiary of a trust, to be derived from a particular source as follows:

• if the income derived by a beneficiary is attributable to passive income for the

purposes of paragraph 6B(1A)(b), the income is deemed to be derived from that source to which the passive income can be directly or indirectly attributed (paragraph 6B(2A)(b);

• if the income derived by a beneficiary is attributable to interest income for the purposes of paragraph 6B(2)(b), the income is deemed to be derived from that source to which the interest income can be directly or indirectly attributed (paragraph 6B(2A)(b).

In the present circumstances, the trustee of the Y Trust proposes to make the trustee of the Z Trust presently entitled to a distribution in respect of the X income year. A portion of that distribution is attributable to rental income and interest income derived by the Y Trust in the A, B, C and D income years.

Section 6(1) of the ITAA 1936, defines 'passive income' to include income derived by way of rent. Accordingly, the distribution by the Y Trust to the Z Trust attributable to the A, B, C and D income years is essentially made up of passive income and interest for the purposes of, respectively, subsections 6B(1A) and 6B(2) of the ITAA 1936. This amount is included in the assessable income of the Z Trust in respect of the X income year (taxed amount).

The Y Trust paid income tax under Country Y income tax law in respect of the taxed amount. According to documentary evidence provided, Country Y taxes were imposed by assessment. The taxes imposed were paid following the date of assessment in respect of each of the A, B, C and D income years.

For the purposes of paragraph 770-130(3)(a), the taxed amount, comprising of passive income and interest, is deemed to be derived by the Z Trust pursuant to subsection 6B(3) of the ITAA 1936, and is attributable to a Country Y source under paragraph 6B(2A)(b) of the ITAA 1936.

The Z Trust has proposed to make no beneficiary presently entitled in the X income year to any part of the distribution, so that, the taxed amount is assessable to the trustee under section 99A of the ITAA 1936 as determined in the response to Question 2 of this ruling.

Country Y income tax paid by the Y Trust is foreign income tax for the purposes of section 770-15 of the ITAA 1997.

Whilst the trustee of the Z Trust has not directly paid foreign income tax in respect of the taxed amount, Country Y income taxes were actually paid by the Y Trust in respect of the Country Y sourced taxed amount included in the Z Trust's assessable income.

In relation to paragraph 770-130(3)(b), although the Country Y tax is paid by the Y Trust, it is paid in respect of the same income included in the assessable income of the Z Trust pursuant to section 99A of ITAA 1936. That is, the trustee of the Z Trust has borne the economic burden of Country Y income taxes paid.

In relation to paragraph 770-130(3)(c) Country Y income taxes paid by the Y Trust results in the distribution to the Z Trust in respect of each of the A, B, C and D income years being less than it would have been had the Country Y income taxes not been paid.

Subsection 770-130(3) of the ITAA 1997 will therefore apply to deem the trustee of the Z Trust to have paid the foreign income tax, that is paid in Country Y in respect of the taxed amount included in the assessable income of the Z Trust.

Country Y Convention

In determining liability to Australian tax on Country Y sourced income, it is necessary to have regard to the tax treaty between Australia and Country Y ('the Country Y Convention').

The Country Y Convention does not disturb Australia's right to tax the Country Y sourced income that is derived by an Australian resident taxpayer. Nor does it restrict or alter Country Y's right to tax the Country Y sourced income.

The Article enabling relief from double taxation in respect of the Country Y Convention requires that, subject to Australian law, credit shall be allowed against Australian income tax payable on income in respect of which Country Y taxes were paid under the law of Country Y and which were levied in accordance with the Country Y Convention.

In summary, the trustee for the Z Trust satisfies the requirements of subsection 770-10(1) of the ITAA 1997 and is entitled to a foreign income tax offset, in the X income year, for Country Y taxes paid in respect of the portion of the distribution relating to the A, B, C and D income years.

The amount of the foreign income tax offset that the trustee of the Z Trust is entitled to in respect of each of the A, B, C and D income years is calculated in accordance with Subdivision 770-B of the ITAA 1997. In particular, section 770-75 of the ITAA 1997 imposes a limit on the amount of the foreign income tax offset that can be claimed in each income year under consideration.

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