Edited version of private ruling

Authorisation Number: 1011518631887

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Ruling

Subject: Foreign investment fund (FIF)

Question 1

Is the lump sum amount you will receive upon closing your account held in the foreign country assessable in Australia?

Answer: Yes.

Question 2

Are you entitled to a foreign income tax offset (FITO) in relation to the tax paid in a foreign country upon closing of your account?

Answer: Yes.

This ruling applies for the following period:

2009-10 income year

The scheme commences on:

1 July 1984

Relevant facts and circumstances

You were assigned to work in a foreign country in 1981.

While employed overseas, that government introduced the concept of retirement scheme. You opened an account in a foreign country and contributed few thousands in the local currency to this account.

You were either not able to make additional contributions to this account or withdraw the amount until you retire.

The scheme is designed to support your retirement

You completed the overseas assignment and left that country.

The overseas finance company wrote to you and informed you to close this account and transfer the funds outside the country.

You have reached your retirement age and now eligible to withdraw the amount from your account.

In your letter dated 21 July 2010, you advised the following additional facts:

You are an Australian citizen

No contributions were made by your employer towards this account

The sole beneficiary in your absence is your partner.

No foreign taxes are payable on this account. You believe that there will be a closing fee when you close this account.

All the deposits into this account were made before the capital gains tax was introduced in Australia in 1985.

As you are currently a resident of Australia, you believe that the overseas finance company will withhold tax at either 15% or 30% on this account when you close and withdraw the amount.

You wish to close this account in the year ended 30 June 2011 and transfer the balance to your Australian super fund as an undeducted contribution. You are the trustee of your personal super fund

Your second choice is to close the account and transfer the balance to a bank account outside of super.

You supplied a copy of the following documents:

Copy of the agreement of your individual retirement plan

Copy of the letter and client statements from the overseas finance company

Question 1

Summary

The lump sum amount you will receive upon closing your account held in the foreign country assessable in Australia.

Reasons for decision

Subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia.

Section 10-5 of the ITAA 1997 lists provisions about assessable income. Included in that 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, that 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:-

corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer (paragraph 99B(2)(a) of the ITAA 1936); or

amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer (paragraph 99B(2)(b) of the ITAA 1936); or

amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936 (paragraph 99(2)(c) of the ITAA 1936).

Your account is a trust set up in a foreign country and you are an Australian resident beneficiary of the trusts. The account is not a superannuation fund for the purposes of the ITAA 1997 and the ITAA 1936 as it is not solely for the provision of retirement benefits. The account is an investment in a foreign trust that fall within the FIF provisions. The practical effect of this is that, unless specifically exempted, the accretion in value of the amounts held in the plans will be included in your assessable income on an annual basis.

There will be no double taxation under subsection 99B(1) of the ITAA 1936 for amounts previously included as assessable income under the FIF measures, as the payments will be treated as non-assessable non-exempt income to the extent allowed for under section 23AK of the ITAA 1936.

Therefore, in your case, any amounts that you will receive as lump sum form the accrued amounts which were not previously assessed under the FIF measures are assessable under subsection 99B(1) of the ITAA 1936 subject to the exclusions in subsection 99B(2) of the ITAA 1936.

The exclusions do not apply as:

· the distributions are from income and accumulated income

· the amounts would be included in your assessable income if they had been derived by you, and

· the amounts are not assessable to you under section 97 of the ITAA 1936 or to the trustee under sections 98, 99 or 99A of the ITAA 1936.

Accordingly the lump sum from your account is assessable to you to the extent that was not previously assessed under the FIF measures.

Question 2

Summary

You are entitled to a foreign income tax offset (FITO) in relation to the tax paid in a foreign country upon closing of your account.

Reasons For Decision

Foreign Income Tax Offset

From 1 July 2008 the foreign tax credit system is replaced by the foreign income tax offset (FITO) system.

Division 770 of the ITAA 1997 allows a foreign income tax offset for foreign tax that a taxpayer has paid on income that is included in the taxpayer's assessable income.

The general rule under section 770-10 of the ITAA 1997 is that, to qualify for an offset for an income year, the taxpayer must have paid foreign income tax on an amount that is included in their assessable income for that year, though there are exceptions in certain situations, such as where the tax has been deducted as source, or otherwise paid on the taxpayer's behalf (section 770-130 of the ITAA 1997).

A FITO is a non-refundable tax offset, and will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax by an amount equal to the foreign income tax paid.

In determining liability to tax on foreign sourced income received by a resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

International Tax Agreements provides that lump sum amount from your account is taxable in Australia but it may also be taxed in the foreign country.

In your case, you will receive the lump sum amount from a foreign company on which you will pay tax and therefore you are entitled to a foreign tax credit.

Note:

Further information regarding foreign investment funds can be obtained from the Tax Office publication Foreign investment fund guide which is available on the Tax Office website at www.ato.gov.au.