Edited version of private ruling

Authorisation Number: 1011709601542

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Ruling

Subject: Pre-marital agreement

Question 1

Are the quarterly payments made by a foreign (non) resident trust under a pre-marital agreement, maintenance payments and non-assessable under section 51-50 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

Question 2

Are the payments only taxable in country X in accordance with an Article of the country X Convention?

Answer:

No.

Question 3

Are the payments made by the foreign (non) resident trust liable to tax in Australia under any other Article of the country X Convention?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You went to country X with the intent to live and marry there.

Prior to your marriage you and your future spouse entered into a pre-marital agreement.

After getting married you applied for permanent residence in country X.

In consideration for you releasing claims you may have acquired by reason of your marriage to your spouse, including any claim for support or as surviving spouse against your spouse's estate in relation to his separate property, your spouse agreed, in the pre-marital agreement to:

(a) establish, as soon as practicable after the marriage, an irrevocable trust in your favour

(b) not later than by his Will, transfer to the Trustee of the Support Trust, cash and/or marketable securities adequate to pay you an annual amount times the cost of living adjustment as defined in quarterly instalments.

The pre-marital agreement further provided that if the Support Trust is not set up at the time of your spouse's death, you would be entitled to enforce a claim against your spouse's estate for full value of your interest under the pre-marital agreement.

Your spouse made provision for the Support Trust to be established and funded after his death. Amendments were made during his lifetime to the trust deed (Trust Deed) of the Revocable Trust, which provided that on his death, if he and you were still married, the Trustees of the Revocable Trust were directed to make such distribution from the Revocable Trust to fund the Support Trust in order to fulfil your spouse's obligations under the pre-marital agreement.

Up to that date of his death, you remained married to each other and were not separated.

Your spouse's last will and testament required his tangible personal property and the residue of his estate to be passed to the Trustees of the Revocable Trust to fund the Support Trust.

The Interim Trust paid you an amount and you paid income tax on that amount in country X.

You regained your Australian residence status for taxation purposes a few years ago.

It is that the Support Trust, when established, will pay you an annual total amount paid quarterly, in satisfaction of your spouse's obligation under the pre-marital agreement, whether from income or capital.

The Support Trust will never be an Australian trust for taxation purposes.

The Interim Trust will never be an Australian resident trust for taxation purposes.

The Revocable Trust has never been and will never be an Australian trust for taxation purposes.

There is a tax treaty between Australia and country X.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 51-50

Income Tax assessment Act 1997 Subsection 6-10(4)

Income Tax assessment Act 1997 Section 10-5

Income Tax Assessment Act 1936 Section 96B

Income Tax Assessment Act 1936 Section 96C

Income Tax Assessment Act 1936 Subsection 99B(1)

Income Tax Assessment Act 1936 Subsection 99B(2)

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 98

Income Tax assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

International Tax Agreements Act 1953 Section 4

Reasons for decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes income derived directly or indirectly from all sources during the income year.

An amount will not be included in assessable income if the amount is exempt income.

Section 51-50 of the ITAA 1997 states that periodic payments in the nature of maintenance will be exempt from income tax where the payment is made:

(i) by an individual (the maintenance payer) or is attributable to a payment made by the maintenance payer; and

(ii) to an individual who is or has been the maintenance payer's spouse; or

to or for the benefit of an individual who is or has been

(a) a child of the maintenance payer; or

(b) a child who is or has been a child of an individual who is or has been a spouse of the maintenance payer.

In your case, the payments distributed by the foreign (non) resident trust do not satisfy the requirements of section 51-50 of the ITAA 1997 to be maintenance payments as they cannot be attributed to payments made by an individual and therefore form part of your assessable income.

Trust distributions

Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list are the following provisions that apply to distributions from a foreign trust:

· sections 96B and 96C of the Income Tax Assessment Act 1936 (ITAA 1936) which deal with income from foreign (non) resident trust estates, and

· section 99B of the ITAA 1936 which deals with receipt of trust income not previously subject to tax.

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) of the ITAA 1936 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 a 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; or

· amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; or

· amounts that have 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 section 98, 99, or 99A of the ITAA 1936.

The amounts paid to you represent trust income of a class which is taxable in Australia, but which has not previously been subject to Australian tax in the hands of either the beneficiary or the trustee. None of the exclusions in subsection 99B(2) of the ITAA 1936 apply.

Country X and Australia tax treaty

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

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.

A Schedule to the Agreements Act contains the tax treaty between Australia and country X (the country X Convention). The country X Convention operates to avoid the double taxation of income received by Australian and country X residents.

An Article of the country X Convention provides that alimony or other maintenance payments arising in country X and paid to a resident of Australia shall be taxable only in country X.

In your case, the payments are not considered to be maintenance payments but distributions from a foreign (non) resident trust. Therefore, the Article of the country X will not apply.

Another Article of the country X Convention deals with the taxation of income not addressed by the other Articles of the country X Convention. This Article of the country X Convention gives Australia a taxing right on the distribution from a trust which is derived from a country X source.

Therefore, the distributions you receive from the country X trust are assessable in Australia under subsection 99B(1) of the ITAA 1936.

Note

You may be entitled to a foreign income tax offset for tax paid in country X.