Edited version of your private ruling

Authorisation Number: 1012586576581

Ruling

Subject: Foreign income - rollover between two foreign trusts

Questions and Answers

1. Are there any income tax consequences for you as a result of converting a Type 1 retirement account (Type 1 RA) to a Type 2 retirement account (Type 2 RA)?

Yes

2. Is the assessable amount the value at conversion less your contributions to the fund?

Yes

3. Are you entitled to a foreign income tax offset?

Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You moved to Australia on date A from Country X and became an Australian resident for income tax purposes on that date.

You had a Type 1 RA in Country X.

On date B in the 2012-13 income year you converted your Type 1 RA into a Type 2 RA, a transaction between two retirement trusts.

The amount transferred from your Type 1 RA to your Type 2 RA included pre-tax contributions made by you.

You had a taxable event in Country X as a result of the conversion and paid tax of $M in Country X in the 2012-13 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1936 Subsection 99B(1)

Income Tax Assessment Act 1936 Subsection 99B(2)

Income Tax Assessment Act 1936 Subsection 97

Reasons for decision

In order to calculate the amount to include in your assessable income as a result of the conversion of your Type 1 RA into a Type 2 RA it is necessary to consider both section 97 of the Income Tax assessment Act 1936 (ITAA 1936) as well as section 99 of the ITAA 1936.

Section 97 of the ITAA 1936

Section 97 of the ITAA 1936 applies to include in the assessable income of a beneficiary of a trust estate, who is not under a legal disability and is presently entitled to a share of the income of a trust estate, their share of the net income of the trust estate.

Subsection 97(1) of the ITAA 1936 applies in your case to any growth in the Type 1 RA from 1 July 2012, as during the period you were a resident beneficiary who was not under a legal disability and who would have been presently entitled to income.

As the conversion happened on date B in the 2012-13 income year, under this provision, you are required to include in your assessable income any growth in the RA between 1 July 2012 and date B.

In addition, you need to include income which is assessable under section 99B of the ITAA 1936.

Section 99B of the 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 received 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.

When an amount is distributed to the beneficiary, subsection 99B(1) of the ITAA 1936 applies to include in the beneficiary's assessable income the distribution less any amounts excluded under subsection 99B(2) of the ITAA 1936.

Subsection 99B(2) of the ITAA 1936 provides that the amount to be included in assessable income under subsection 99B(1) of the ITAA 1936 is not to include any amount that represents:

· the corpus of the trust

· amounts that would not have been included in the assessable income of a resident taxpayer who was presently entitled to the amounts at the time they were derived by the trust and

· amounts previously included in the beneficiaries income under section 97 of the ITAA 1936. Section 97 of the ITAA 1936 requires a trust beneficiary to include in their assessable income the share of the net income of the trust to which they are presently entitled.

In your case the conversion of your Type 1 RA into a Type 2 RA constitutes a distribution from a foreign trust and is assessable under subsection 99B(1) of the ITAA 1936. The contributions you made constitute corpus of the trust.

The assessable amount to include in your tax return is the value of the conversion (as at date B) reduced by your contributions and any amounts of income which you have already included under section 97 of the ITAA 1936 for the period 1 July 2012 to date B.

Under the Country X Convention, the conversion you made constitutes a withdrawal and amounts withdrawn from an RA are taxable in Australia but may also be taxed in the country of source (in Country X).

Foreign income tax offset

Division 770 of the Income Tax Assessment Act 1997 allows a foreign income tax offset (FITO) for foreign tax you have paid on income that is included in your assessable income. Any foreign tax paid on amounts not assessable in Australia is not included in FITO. The FITO is a non-refundable tax offset which reduces your income tax payable.

Under the tax offset ordering rules, the FITO is applied after all other non-refundable tax and non-transferable offsets. Once your tax payable has been reduced to nil, any unused foreign income tax offset is not refunded to you, nor can it be carried forward to later income years.

If claiming a foreign income tax offset of more than $1,000, you will first need to work out your foreign income tax offset limit. Details of how to calculate the FITO are contained in the Guide to foreign income tax offset rules 2012-13 which is available on our website.