Edited version of your written advice

Authorisation Number: 1051282732942

Date of advice: 14 September 2017

Ruling

Subject: International pension and Foreign Trust income

Question 1

Is your social security pension received from Country A assessable in Australia?

Answer

No

Question 2

Is any part of the lump sum payment from your retirement account held in Country A assessable under section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

Are any parts of the lump sum payments non-assessable under Subsection 99B(2) of the Income Tax Assessment Act 1936 ITAA 1936?

Answer

Yes

Question 4

Are you entitled to receive a foreign income tax offset (FITO) in relation to any foreign tax paid on the lump sum received from your retirement account held in Country A that is assessable in Australia, which does not exceed the Australian tax payable on the assessable amount?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commenced on:

1 July 2016

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You receive a social security pension from the Government in Country A.

You renounced your citizenship in Country A in 2016.

You held an account in Country A for the purposes of saving for retirement, which is treated as a foreign trust (The foreign trust account).

The foreign trust account is a consolidated account of various Government and corporate defined benefit retirement contribution plans which allows eligible employees of an organisation to contribute pre-tax contributions from their salary to fund retirement.

The assets in your foreign trust account comprise of several previous employer retirement plans you held which were then consolidated into the foreign trust account.

The Foreign Trust Account was established, administered and managed in Country A.

Renunciation of your citizenship in Country A

When you renounced your citizenship in Country A in 2016, under Country A’s taxation law "mark to market" of global assets (and payment of capital gains on the difference between cost and market value) applied, and a taking of all retirement funds as though the stream of benefits were paid in full "up front" as income.

The effective date used for mark to market and mark to income is the day before renunciation in 2016.

The effect of this law in Country A was that the foreign trust account value in 2016 was viewed as having been paid in full to you immediately, and as such was required to be reported as income in your 2016 Country A tax return which you lodged in 2017. The total final tax payable attributable to the renunciation of your Country A citizenship was calculated at that point.

Balance withdrawn from your foreign trust account and tax consequences in Country A

In 2017 you closed the foreign trust account and withdrew the entire balance as a lump sum and a non-final amount of tax was withheld from this amount. As this amount was a non-final withholding, it will be claimable as a credit when you lodge your 2017 year Country A tax return, where the final tax payable on this transaction will be calculated.

When you lodge your 2017 year Country A tax return, Country A taxation authorities have advised you will also receive a credit for the final tax paid that is attributable to the renunciation of your Country A citizenship in your 2016 year Country A tax return.

On advice from your Country A tax accountant you have made payments towards your Country A tax debt.

Contributions versus earnings in the foreign trust account

You have calculated the total amount you have contributed to the foreign trust account since it was established, and the total earnings amount in the foreign trust account since it was established.

The total earnings amount is comprised of interest and dividends, and realised capital gains from assets held within the foreign trust account.

From the amount in realised capital gains, a percentage related to assets sold that were held within the foreign trust account for longer than 12 months.

You also had a capital loss in the 2016 year relating to assets sold that were held within the foreign trust account.

Relevant legislative provisions

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

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 Schedule 1 Article 18

Income Tax Assessment Act 1997 section 6-10

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

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 paragraph 99B(2)

Income Tax Assessment Act 1936 subsection 481(3)

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 subsection 102-5(1)

Reasons for decision

Question 1

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.

Pension income is ordinary income assessable under subsection 6-5(2) of the ITAA 1997.

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 A agreement is listed in section 5 of the Agreements Act.

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

Article 18 of the Country A agreement considers the tax treatment of Pensions, Annuities, Alimony and Child Support. The relevant paragraph in your case is paragraph 2 of article 18 of the Country A agreement.

Paragraph (2) of Article 18 states that Social security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of Country A shall be taxable only in the first-mentioned State.

As such your social security pension received from Country A is not taxed in Australia under article 18 of the Country A agreement and is not required to be declared in your Australian tax return.

Questions 2 and 3

Summary

Income that is withdrawn from the foreign trust account is similar to a distribution from a trust. Any amounts distributed (withdrawn) or credited from your foreign trust account are assessable under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) less any amounts excluded under subsection 99B(2).

Detailed reasoning

You have a foreign trust account in the US, which is an individual retirement account. The Country A tax authorities has a publication which states that a foreign trust account is a personal savings plan that gives you tax advantages for setting aside money for retirement. It describes that the foreign trust account as a trust or custodial account set up in Country A for the exclusive benefit of you or your beneficiaries.

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

The foreign trust account is defined as a foreign trust in subsection 481(3) of the ITAA 1936 and is therefore a foreign investment fund (FIF). The foreign trust account is not a superannuation fund for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997) and the ITAA 1936 as it allows for withdrawals for pre-retirement purposes. Therefore a foreign trust account is not established solely for the provision of retirement benefits.

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 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 Income Tax Assessment Act 1936 (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 99B(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).

As withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from a foreign trust are assessable under subsection 99B(1) of the ITAA 1936.

However, the amount assessable under subsection 99B(1) of the ITAA 1936 does not include amounts listed under subsection 99B(2) of the ITAA 1936.

A capital distribution, to the extent that it forms part of the corpus of the trust, would come within paragraph 99B(2)(a) of the ITAA 1936. Distributions, to the extent that comes within subsection 99B(2) of the ITAA 1936, would be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936.

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

Amounts assessable under subsection 99B(1) of the ITAA 1936 form part of a taxpayers assessable income under subsection 6-10(4) of the ITAA 1997.

In your case, as you have withdrawn a lump sum amount from the foreign trust account, at the time of the withdrawal it is deemed that income has been paid to you or applied for your benefit. Therefore, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from the foreign trust account are assessable under subsection 99B(1) of the ITAA 1936 less any amounts that would fall under subsection 99B(2).

Other amounts derived by a trust estate otherwise not assessable if derived by a resident taxpayer under Paragraph 99B(2)(a) of the ITAA 1936

Capital gains discount

As 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, consideration needs to be given to the portion of the total earnings amount that relates to realised capital gains from assets held within the foreign trust account and whether a resident Trust is eligible for the CGT discount.

Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997) allows for a discount for capital gains tax provided certain conditions are met. Section 115-25 of the ITAA 1997 requires that the asset must have been acquired at least 12 months prior to the CGT event.

Subsection 115-100(a) of the ITAA 1997 provides that if the taxpayer is an individual or a trust (excluding a complying superannuation entity), the CGT discount method applies to include only 50% of the capital gain in assessable income.

From the amount in realised capital gains a percentage related to assets sold that were held within the foreign trust account for longer than 12 months.

As an Australian resident Trust is eligible for the CGT discount, you are entitled to apply this to the realised capital gains amount attributable to assets sold that were held within the foreign trust account for longer than 12 months.

Calculation of gains and losses - Net capital gain

Division 102 of the Income Tax Assessment Act 1997 (ITAA 1997) specifies the calculation of a net capital gain. Subsection 102-5(1) of the ITAA 1997 provides that the capital gains made during the year are reduced by any capital losses made during the same year.

In determining the amount of a capital gain that is included in the net income of a trust estate, the gain must first be reduced by any of the trust's prior or current year capital losses.

As such you are entitled to fully offset the loss incurred in the 2016 year against the short term capital gain realised in the same year.

Question 4

Foreign Income Tax Offset (FITO)

If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation.

These rules apply for income years that start on or after 1 July 2008. Different rules apply for income periods up to 30 June 2008.

To qualify for a foreign income tax offset (FITO) you must meet all of the following criteria:

● You must have paid the foreign tax on the foreign income,

● The foreign tax must be a tax which you were personally liable for, and

● The income or gain that the foreign tax was paid must be included in your assessable income for Australian income tax purposes.

The foreign income tax offset is a non-refundable tax offset. The foreign income tax offset is applied to your income tax liability including the Medicare levy and the Medicare levy surcharge where applicable. Any excess is not refunded to you.

Whether you are eligible for a foreign tax credit is dependent on the relevant double tax agreement between Australia and Country A.

Australia has a tax treaty with Country A (The Country A Convention). The Country A Convention operates to avoid the double taxation of income received by Australian and Country A residents.

Under Article 21 of the Country A convention your share of distributions from Country A are taxed in the country of source and may be taxed in Australia. However, Article 22 of the Country A convention provides for relief from double taxation.

Accordingly, you will be entitled to a foreign income tax offset in respect of the foreign tax paid in the Country A so long as you paid income tax to the Country A tax authorities, and the tax paid is related to a taxing event in Australia.

The renunciation of your citizenship in Country A is not a taxing event in Australia.

However the taxation authorities in Country A have confirmed that when you lodge your 2017 year Country A tax return they will allow a credit for the final tax paid relating to the renunciation of your citizenship in Country A (in the 2016 Country A tax year).

Due to this, along with the fact that this also relates to the same funds held within your foreign trust account, we consider that the taxing event in Country A resulting from the renunciation of citizenship has a sufficient connection to the actual taxing event in Australia (the withdrawal from your foreign trust account) to allow you to claim a FITO on this amount so long as the income that the foreign tax was paid on is required to be included in your assessable income for Australian income tax purposes.

In addition the closure of your foreign trust account in 2017 and subsequent withdrawal of the account balance (of which an amount tax was withheld in Country A at the time - a non-final withholding), is a taxing event in Australia.

As such you will also be entitled to a foreign income tax offset in respect of the remaining final tax payable in Country A that relates to the lump sum withdrawal, so long as the income that the foreign tax was paid on is required to be included in your assessable income for Australian income tax purposes.

In your case it is only the interest earned over the years and a percentage of the realised capital gains that is assessable in Australia (all of this amount would be assessable when received by you).

As such you can only claim the FITO on the amount of foreign tax paid in relation to the renunciation of your Country A citizenship, and the interest earned plus the relevant percentage of capital gains realised in the foreign trust account that is assessable in Australia.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).