Edited version of private ruling

Authorisation Number: 1011630632133

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Ruling

Is the increase in value of your pension fund included in your assessable income under the foreign investment fund (FIF) rules?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are a citizen of country X by birth.

You are now a resident of Australia.

You had several pension funds in country X which have been transferred into one pension fund in country X.

You have not made any further contributions to the funds since your arrival in Australia.

The value of your country X pension funds has grown since your arrival in Australia and 30 June 2010.

As at 30 June 2010 the value of your investment with the pension fund exceeds $50,000.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 529

Income Tax Assessment Act 1936 Subsection 481(1)

Income Tax Assessment Act 1936 Subsection 481(2)

Income Tax Assessment Act 1936 Subsection 481(3)

Income Tax Assessment Act 1936 Subsection 483(2)

Income Tax Assessment Act 1936 Subsection 485(3)

Income Tax Assessment Act 1936 Section 23AK

Income Tax Assessment Act 1936 Section 613

Income Tax Assessment Act 1936 Section 532

Income Tax Assessment Act 1936 Section 533

Income Tax Assessment Act 1936 Subsection 605(2)

Income Tax Assessment Act 1936 Subsection 515(1)

Income Tax Assessment Act 1936 Section 515

Reasons for decision

Foreign investment fund income is included as a statutory income under section 529 of the Income Tax Assessment Act 1936 (ITAA 1936). The intent of the FIF measures is to tax Australian resident taxpayers on an accruals basis. The FIF measures may therefore apply to include in your assessable income an amount even though you have not received anything.

A FIF is any foreign company or foreign trust (subsection 481(1) of the ITAA 1936).

A company is a foreign company if it is not a resident of Australia (subsection 481(2) of the ITAA 1936).

A trust is a foreign trust if it:

· is not an Australian trust, and

· did not result from:

- Will, a codicil or a court order that varied or modified a will or a codicil, or

- intestacy or a court order that varied or modified the application of the law relating to the distribution of the estates of persons who die without a will (subsection 481(3) of the ITAA 1936).

Most types of trusts including retirement and pension funds fall within the definition of a FIF under subsection 481(1) of the ITAA 1936.

Interests in a FIF subject to the FIF measures

An interest in a FIF that is a foreign trust is:

· an interest in the corpus or income of the trust, or

· an option, convertible note, or other instrument, that confers an entitlement to acquire such an interest (subsection 483(2) of the ITAA 1936).

Your investment with the country X pension fund represents an agreement by an authorised trustee to hold certain funds in trust for an individual. Therefore, you have an interest in a foreign trust that satisfies the requirements of an interest in a FIF under subsection 483(2) of the ITAA 1936.

Interests in a FIF subject to the FIF measures

Section 529 of the ITAA 1936 is the operative provision of the FIF measures. It includes a statutory amount of income (known as FIF income) in a taxpayer's assessable income, in relation to a notional accounting period of a FIF, for the year of income in which that notional accounting period ended.

The FIF measures apply to your interest in a FIF for the notional accounting period of the FIF that ended in your income year if:

· you had an interest in that FIF at the end of the income year, and

· you were a resident of Australia at any time in that income year (subsection 485(3) of the ITAA 1936).

Methods of taxation

There are three methods that can be used to determine the FIF income that has accrued to you in a particular year. These are:

· the market value method

· the deemed rate of return method, and

· the calculation method.

It is expected that the majority of taxpayers who will be liable to tax under the FIF measures will use the market value method to work out the FIF income to include in their assessable income.

Attribution accounts

FIF attribution accounts record the income attributed or distributed to the taxpayer from each of their interests in a FIF or foreign life policy (FLP). They allow the taxpayer to claim exemptions for FIF income previously attributed to them, for example where, after being subject to FIF taxation under the FIF measures, they later:

· receive a distribution of income or gains from a FIF or FLP (section 23AK of the ITAA 1936)

· dispose of the interest in a FIF or FLP (section 613 of the ITAA 1936), or

· use a FIF loss to reduce assessable income (section 532 and 533 of the ITAA 1936).

Attribution accounts operate on the basis of credits and debits. You will have a FIF attribution credit recorded in your attribution account if an amount of FIF income is included in your assessable income under the FIF measures under section 529 of the ITAA 1936. The amount of the FIF attribution credit is equal to the amount included in your assessable income (subsection 605(2) of the ITAA 1936).

You will have a FIF attribution debit recorded when distributions are made to you. Debits trace the movements of profits included in your assessable income under the FIF measures and prevent that income, which has been attributed to you, from being taxed again.

Exemption from FIF taxation

The main exemption that could apply to exclude attributable income in relation to your FIF investment is the small investor exemption.

The small investor exemption is available under subsection 515(1) of the ITAA 1936. This exemption applies to exclude a taxpayer (who is a natural person) from FIF taxation that would otherwise be taken to accrue from a FIF if the value of the interests of the taxpayer and any associates (for example the taxpayer's spouse) were $50,000 Australian dollars or less.

In your case, your interest in the FIF exceeds $50,000 therefore the exemption under section 515 of the ITAA 1936 will not apply.

Further information may be obtained from the Tax Office publication Foreign investment fund guide (NAT 2130) which is available on the Tax Office website.

Note

The FIF rules have been repealed for the 2010-11 and subsequent income years. Therefore, from 2010-11 income year Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trust no longer need to include income on attribution basis under the FIF rules.