Edited version of your private ruling

Authorisation Number: 1012235928675

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Ruling

Subject: Foreign income

Questions and answers:

Is the annuity income you received from Country X between date A and date B, as a temporary resident, included in your Australian tax return?

No

Is the annuity income you receive from Country X date C, on becoming a permanent resident, included in your Australian tax return?

Yes

Are funds that you received from making withdrawals from your Country X bank account, pertaining to the sale of your business in Country X, between date A and date B, as a temporary resident, liable to Australian tax?

No

Are funds that you receive from making withdrawals from your Country X bank account, pertaining to the sale of your business in Country X, subject to the FOREX (foreign exchange) rules from date C after becoming a permanent resident?

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a citizen of Country X.

Your country of origin is Country X.

You moved to Australia on date A on a temporary visa.

You are an Australian resident for tax purposes and have been a resident of Australia since date A.

You became a permanent resident on date C.

You were a temporary resident for tax purposes for the period date A until date B.

You are in the process of becoming an Australian citizen.

You sold your home prior to moving to Australia and have bought a home in Australia.

You receive a monthly pension from Country X from a retirement annuity.

You had a business in Country X. The business was purchased by a person prior to your leaving Country X. The person has since liquidated the business and tries to pay you as and when he can afford it.

All payments from your Country X pension and from the person who bought your business go into a bank account in Country X. This account was opened after 1 July 2003 just prior to you leaving Country X. You make withdrawals from time to time and transfer the money to your Australian bank account.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1936 Section 27H.

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

Income Tax Assessment Act 1997 Section 6-10(4).

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section .108-5

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1997 Section 116-20.

Income Tax Assessment Act 1997 Section 768-910.

Income Tax Assessment Act 1997 Section 775-45(1)-(4).

Income Tax Assessment Act 1997 Section 775-15.

Income Tax Assessment Act 1997 Section 775-30.

Income Tax Assessment Act 1997 Section 995-1.

International Tax Agreements Act 1953 Sections 4 and 5

Reasons for decision

We shall consider the assessability of your annuity income from Country X firstly as a temporary resident and then as a permanent resident. We shall then consider your bank account in Country X and the tax consequences of making withdrawals from the account, firstly as a temporary resident and then as a permanent resident.

Foreign income exemption for temporary residents

From 1 July 2006, a person does not have to pay tax on most of their foreign income if they:

· are an individual who is a resident of Australia for tax purposes; and

· satisfy the requirement of being a temporary resident.

A temporary resident is a person who:

· holds a temporary visa granted under the Migration Act 1958, and

· is not an Australian resident within the meaning of the Social Security Act 1991, and

· the taxpayers spouse is not an Australian resident within the meaning of the Social Security Act.

A person will permanently cease to qualify as a temporary resident if they:

· become an Australian citizen or hold a permanent visa for Australia, even if they hold a temporary visa at a later time or

· marry or establish a de-facto relationship with a person who is a permanent resident or Australian citizen (or who becomes a permanent resident or Australian citizen during the relationship) even if the relationship subsequently breaks down.

A person can be an Australian resident and a temporary resident at the same time. You became an Australian resident for tax purposes on date A. You were a temporary resident for the period date A until date B. From date C, you became a permanent resident.

1.Country X annuity income

Assessability of annuity income as a temporary resident

Australian residents are assessable on income derived from all sources, whether in or out of Australia. You have been a resident of Australia for tax purposes since date A.

However, under section 768-910 of the Income Tax Assessment Act 1997 (ITAA 1997) temporary residents of Australia do not have to pay tax in Australia on ordinary or statutory income derived from a foreign source; excluding employment related income and capital gains on shares and rights acquired under employee share schemes:

Annuity income is considered to be statutory income. As you were a temporary resident for the period date A until date B, the annuity which you received from Country X for that period is exempt from tax in Australia. As a result it does not need to be shown on your tax return for this period.

Assessability of annuity income as a permanent resident

Subsection 6-10(4) of the 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 those provisions about assessable income. Included in this list is section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that annuities and superannuation pensions are included in assessable income.

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).

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. 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 X Agreement is listed in section 5 of the Agreements Act.

The Country X agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Country X agreement operates to avoid the double taxation of income received by residents of Australia and Country X.

Article 18 of the Country X Agreement deals with pensions and annuities.

Article 18(1) provides that a pension or annuity derived by an Australian resident from Country X sources shall be exempt from tax in Country X to the extent that such pensions and annuities are included in taxable income in Australia.

In your case, you have been an Australian resident for taxation purposes from the date of your arrival. As mentioned your annuity income from Country X is not assessable in Australia as a temporary resident. As you became a permanent resident on date C, from that date your Country X annuity is included in your assessable income in Australia under subsection 6-10(4) of the ITAA 1997 and exempt from tax in Country X.

Note

Under the tax treaty that Australia has with Country X, pensions and annuities are only taxable in Australia. Consequently, Country X has no right to tax the income. As such, if tax has been paid on the income in South Africa, you are not entitled to a foreign income tax offset.

2. Capital gains tax and foreign exchange gains and losses (FOREX)

As you had a business and currently have a bank account in Country X from which you make withdrawals, we need to look at the capital gains tax and foreign exchange provisions.

Capital gains tax

Capital gains tax (CGT) is the tax that you pay on any capital gain that is included in your annual tax return. It is not a separate tax, merely a component of your income tax.

A capital gain or capital loss may arise if a CGT event happens to a CGT asset.

The timing of an event is when a person stopped being the owner of the property. Whilst a business is not a CGT asset as such, several assets are involved in running a business such as land and goodwill. In your case you transferred your business to someone before you became an Australian resident and thus the relevant CGT events occurred when you were a non-resident of Australia for tax purposes.

For most CGT events, the capital gain is the difference between the capital proceeds and the cost base of the asset. A capital loss is the difference between the reduced cost base and the proceeds.

The capital proceeds are generally the amount of money or the value of any property a person receives or is entitled to receive. In your case you are receiving payments from the person who purchased your business. These are amounts you are entitled to receive (capital proceeds). As these relate to a CGT event that occurred when you were a non-resident of Australia, the payments you receive are not assessable in Australia.

However, as the payments are going into a bank account in Country X, this is a foreign bank account which is subject to the foreign exchange (FOREX) rules.

FOREX rules

a) Temporary resident

If a taxpayer is a temporary or foreign resident, they are subject to CGT if a CGT event happened to a CGT asset that is taxable Australian property.

Taxable Australian property includes:

· a direct interest in real property situated in Australia or a mining, prospecting or quarrying right to minerals, petroleum and quarry materials situated in Australia.

· a CGT asset that have been used at any time in carrying on a business through a permanent establishment in Australia.

· an indirect Australian real property interest which is an interest in an entity, including a foreign entity, where a taxpayer and his associates hold 10% or more of the entity and the value of a taxpayer interest is principally attributable to Australian real property.

Taxable Australian property also includes an option or right over one of the above.

In your case, the above conditions do not apply to you for the time you were a temporary resident. The sale of your business in Country X and withdrawals from your Country X bank account are not affected by these conditions.

b) Permanent resident

Foreign exchange (forex) gains and losses

In 2003, the Government passed legislation which resulted in the inclusion of Division 775, foreign currency gains and losses in the ITAA 1997.

The general principle of the Division is that foreign currency gains are included in a person's assessable income, and foreign currency losses are deductible if they occur as a result of a forex event (Sections 775-15 and 775-30 of the ITAA 1997).

Bank accounts opened after 1 July 2003

Foreign currency is a capital gains tax (CGT) asset. Foreign currency assets that are of a private nature are personal-use assets. However, bank accounts denominated in a foreign currency are not foreign currency but rather a chose in action, or more specifically a debt (or debts) owed by the bank that are denominated in a foreign currency.

When a customer deposits money into a bank account the customer acquires contractual rights as the creditor of the bank. Similarly, when an amount is withdrawn from a bank account some or all of these previously acquired rights are extinguished or satisfied. The nature of the contractual relationship remains constant. That is, there is a single chose in action in respect of the customer's right to be repaid the amount previously deposited.

Forex realisation event 2 (FRE 2)

You make a forex realisation gain or loss only when a forex realisation event (FRE) happens. There are 5 such events. FRE 2 happens if an entity ceases to have a right, or part of a right, to receive foreign currency which is created or acquired in return for paying an amount of Australian currency or foreign currency. The time of FRE 2 is when the right or part of the right ceases.

In your case, the balance standing to the credit of your Country X bank account represents the right to receive foreign currency. These rights were acquired in return for depositing foreign currency into the account. On each occasion a withdrawal is made from your account, FRE 2 happens. This happens on a first-in first-out basis.

Forex realisation gains and losses

A forex realisation gain is made if the AUD equivalent of the amount received in respect of FRE 2 happening exceeds the forex cost base of the right as determined at the tax recognition time. Conversely, a forex realisation loss is made if the AUD equivalent of the amount received falls short of the forex cost base of the right as determined at the tax recognition time.

The forex cost base is the AUD equivalent of the amount you paid to acquire the right or part of the right. The forex cost base is worked out at the tax recognition time. Pursuant to item 5 of the table to subsection 775-45(7) of the ITAA 1997, the tax recognition time is when the rands were deposited into your Country X account. However, as explained below the tax recognition time may be modified for an FRE 2 which happens when you have made a limited balance election.

The amount of forex realisation gain or loss is so much of the excess or shortfall that is attributable to a currency exchange rate effect. A currency exchange rate effect is described as any currency exchange rate fluctuation or as the difference between an expressly or implicitly agreed currency exchange rate for a future time, and the actual currency exchange rate at that time.

As mentioned a forex realisation gain made as a result of FRE 2 happening during a year is included in assessable income. Conversely a forex realisation loss is deductible from assessable income.

Private or domestic exemption for Forex purposes

For most individual taxpayers forex gains or losses will generally be ignored if the gain or loss is of a private or domestic nature, but where the gain or loss results from carrying on a business or a profit-making undertaking or plan, the gain or loss will be assessable income or an allowable deduction.

There is no definition for private or domestic in the forex legislation. Each case is determined on the facts of individual arrangement. Some of the factors taken into consideration include,

where did the money deposited into the account come from and to what use are the withdrawals put? For example if the deposits are from salary and wage income and the withdrawals are used for general living expenses then the account would be considered to be private and domestic

If the funds are from the sale of a domestic asset, for example a main residence, then the account would be a domestic account.

If the account is a high interest bearing term deposit then this would not generally be considered private or domestic.

In your case, the Country X pension which is deposited into your Country X bank account would be considered to be private or domestic. By contrast the amounts deposited relating to the sale of your business would not be private or domestic as they are as the result of a business venture.

Limited balance election

There are limited circumstances where forex gains or losses of a private or domestic nature are subject to Australia's CGT provisions. Foreign currency bank accounts are a CGT asset and may be subject to the capital gains provisions each time a CGT event happens to them. CGT event C2 happens each time an amount is withdrawn from a foreign currency bank account. If the gain is assessable, or the loss is allowable, under the CGT provisions the forex gain or loss will be subject to the forex provisions.

Where the forex provisions do apply there is a provision that may allow the taxpayer to disregard any forex gain or loss. The limited balance election enables a taxpayer to disregard specified forex gains or losses on certain foreign currency denominated bank accounts with low balances. Any capital gain or loss made as a result of CGT event C2 happening is also disregarded.

The limited balance election has strict limits on the amount of currency flowing through the accounts. If the taxpayer breaches those limits all of the taxpayer's gains/losses will be assessable/deductible.