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Edited version of private ruling
Authorisation Number: 1011721153901
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Ruling
Subject: Income - offsets - non resident
Question 1
Are you entitled to claim credit in your income tax return for the tax withheld on tax deferred amounts?
Answer: No.
Question 2
Is the rate of withholding tax deducted under Subdivision 12-H of the Taxation Administration Act 1953 (TAA 1953) 30%?
Answer: Yes.
Question 3
Are you entitled to claim credits in your income tax returns for Tax File Number (TFN) withholding tax if you have nil income?
This ruling applies for the following periods
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commenced on
1 July 2007
Relevant facts
You are a resident of Country A.
You acquired stapled securities in an Australian Infrastructure Fund (AIF) in the 2006-07 year of income.
The AIF is a managed investment fund.
You received distributions of net income from the AIF comprising:
· franked dividends from which no withholding taxes were deducted in terms of Part III Div 11A of the Income Tax Assessment Act 1936 (ITAA 1936)
· Interest from which withholding tax was deducted in terms of Part III Div 11A of the ITAA 1936
· unfranked dividends from which withholding tax was deducted in terms of Part III Div 11A of the ITAA 1936
· fund payments from which withholding tax was deducted under Subdivision 12-H of the TAA 1953.
You held shares in AIF from which fully franked dividends were paid from which no withholding taxes were deducted in terms of Part III Div 11A of the ITAA 1936.
Tax file number withholding tax was deducted.
Relevant legislative provisions
Subsection 95(1) of the Income Tax Assessment Act 1936
Section 98 of the Income Tax Assessment Act 1936
Subsection 98(4) of the Income Tax Assessment Act 1936
Section 98A of the Income Tax Assessment Act 1936
Section 98G of the Income Tax Assessment Act 1936
Section 99A of the Income Tax Assessment Act 1936
Subsection 98A(2) of the Income Tax Assessment Act 1936
Section 95(1) of the Income Tax Assessment Act 1936
Section 99 of the Income Tax Assessment Act 1936
Subsection 12-385(1) Taxation Administration Act 1953
Subsection 12-385(2) Taxation Administration Act 1953
Subsection 12-385(3) Taxation Administration Act 1953
Subsection 12-385(4) Taxation Administration Act 1953
Section 18-15 of Schedule 1 Taxation Administration Act 1953
Section 104-70 of the Income Tax Assessment Act 1997
Reasons for decision
Taxation of trusts
Net income, in relation to a trust estate, means the total assessable income of the trust estate as if the trustee was a taxpayer in respect of that income and was a resident, less all allowable deductions (subsection 95(1) of the ITAA 1936).
Trustees are assessable on: · income to which no beneficiary is presently entitled (sections 99 and 99A of the ITAA 1936) · income to which beneficiaries who are under a legal disability are presently entitled (Section 98 of the ITAA 1936) · Australian source income to which foreign residents are presently entitled (subsection 98(4) of the ITAA 1936). This income assessed in the hands of the trustee is also assessed in the hands of the beneficiary under section 98A of the ITAA 1936 and a credit allowed for tax paid by the trustee. If the tax paid by the trustee exceeds the amount payable by the beneficiary, the difference is payable to the beneficiary subsection 98A(2) of the ITAA 1936. Dividend income and interest income derived by a trustee of a trust estate retain their character as income of those types when a beneficiary becomes presently entitled to a share of the income of the trust estate (Income Tax Ruling IT 2680) |
Managed investment trusts
For income years starting on or after 1 July 2008, a concessional withholding tax regime applies to certain distributions made by Australian managed investment trusts (MIT's) to foreign resident investors (Schedule 1 Subdivision 12-H of the TAA 1953) This new regime, replaced the 30% withholding requirement that formerly applied for the 2007-08 year of income.
Section 98G of the ITAA 1936 states that subsection 98(4) of the ITAA 1936 does not apply to so much of the net income of a trust estate as represents income to which a beneficiary is presently entitled and gives rise to an amount from which an entity is required to withhold an amount under Subdivision 12-H in Schedule 1 to the TAA 1953.
If a trustee of an Australian managed investment trust has made a fund payment to a non resident. They must withhold an amount equal to the amount of the fund payment multiplied by the specified rate (subsections 12-385(1) and 12-385(2) of the TAA 1953). The specified rate depends upon the address or place for payment and the income year to which the fund payment relates. The rate for Country A is 30% as Country A is not an information exchange country (regulation 44E of the Taxation Administration Regulations 1976; subsections 12-385(3) & 12-385(4) of the TAA 1953).
A fund payment is, broadly, a component of a payment made by a managed investment trust that represents a distribution of Australian source net income of the trust, from which the following are excluded: dividends, interest, a capital gain or loss from a Capital Gains Tax (CGT) asset that is not taxable Australian property, non Australian source income and deductions relating to excluded amounts
The trustee has only limited time to prepare accounts. The expected net income of the trust and the expected amounts of future fund payments are to be worked out on the basis of the trustee's knowledge when the actual payment is made. So the fund payment is only an estimate.
The rate of withholding tax will not generally be affected by the application of a double tax agreement (DTA), despite the fact that the DTA may limit the amount of tax that the ultimate foreign beneficiary may be liable for. This is because the withholding tax under Subdivision 12-H of the TAA 1953 does not determine the tax liability of the foreign resident investor rather; it merely provides an effective means of collection of that tax. The foreign resident investor is liable for taxation on the fund payment in accordance with Subdivision 840-M of ITAA 1997 and can obtain a refund of any amount deducted which exceeds the tax payable.
It is necessary to determine whether the Country A Convention contained in A Schedule of the International Tax Agreements Act 1953 (Agreements Act) affects the rate of withholding.
There is no relief from this rate provided by the Country A Agreement.
Therefore as a Country A resident the rate applicable is 30%.
Tax deferred amounts
Tax-deferred amounts are non-assessable amounts. You adjust the cost base and reduced cost base of your units by these amounts.
You make a capital gain from this event if the total non-assessable part of the payment made by the trustee during the income year is more than the cost base of your units. In such a case, the cost base and reduced cost base of the unit is reduced to nil.
As a result of recent stapling arrangements, some investors in managed funds have received units which have a very low cost base. The payment of certain non-assessable amounts in excess of the cost base of the units will result in these investors making a capital gain.
In your case since the total tax deferred amounts exceeded the cost base of the units you were liable to capital gains tax.
Amendments
The office prefers that requests for amendment be made by letter as an amended return may get confused with the original return.
A recipient of a withholding payment is entitled to a credit equal to the amounts withheld (TFN credits) during an income year if, for the income year an assessment has been made of the income tax, payable by the recipient or an assessment has been made that no income tax is payable by the recipient (section 18-15 of Schedule 1 TAA 1953). Entitlement to the credit arises at the time of the issue of the assessment (Cumins v DFC 2007 ATC 5459).
Trust distributions received are shown at item 13 in the tax return (supplementary section). Trust income received at item13L, share of credit for tax file number amounts at 13R