Edited version of private advice

Authorisation Number: 1012658903825

Ruling

Subject: The assessability of foreign source income

Questions

1. Is any part of the lump sum payment from a foreign retirement savings account included in your assessable income?

Answer: Yes

2. Will you be entitled to claim a credit (in full or in part) for the tax withheld in respect of the lump sum payment?

Answer: Yes

This ruling applies for the following period(s)

The year ended 30 June 2014.

The scheme commences on

1 July 2013

Relevant facts and circumstances

You became a resident of Australia for tax purposes in the 1980's.

You held a foreign retirement savings account (the Fund) while you were living and working overseas.

You made personal contributions while a resident of the foreign country.

You have not made any contributions to the Fund since you became a resident of Australia.

You originally believed that you could not withdraw your funds until you were of retirement age. You recently discovered that you could withdraw the money at any time.

In 20XX, you decided to withdraw the funds from the account to assist in purchasing a home for your retirement and all the monies have now been transferred to Australia.

In the 20XX financial year, you withdrew the entire balance from your account.

Non-resident withholding tax was withheld from the payments in the foreign country and you received the net amount.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 - section 99B

Income Tax Assessment Act 1936 - section 102 AAZD

Income Tax Assessment Act 1997 - section 6-5

Income Tax Assessment Act 1997 - section 6-10

Income Tax Assessment Act 1997 - section 10-5

Income Tax Assessment Act 1997 - section 770-10

Income Tax Assessment Act 1997 - section 770-15

Income Tax Assessment Act 1997 - section 770-70

Income Tax Assessment Act 1997 - section 770-140

Reasons for decision

The retirement savings account is not a 'locked-in' account as the Fund allows for access of benefits prior to retirement age and is not considered a superannuation fund for Australian tax purposes.

The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)).

Your withdrawal from the Fund account is not ordinary income (subsection 6-5(2) of the ITAA 1997).

'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). 

Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the Income Tax Assessment Act 1936 (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:  

a)  corpus of the 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 

b)  Amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer;

c)  amounts that have been 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 sections 98, 99 or 99A of the ITAA 1936; or

d)  and amounts included in assessable income under section 102AAZD of the ITAA 1936 (that is, amount included under the transferral trust measures for taxpayer having transferred property or services).

The Fund is treated as a foreign trust for Australian tax purposes.

Since you are an Australian resident, who had made withdrawals from a foreign trust, the amounts withdrawn from the Fund are similar to distributions from a trust and would be assessable under subsection 99B(1) of the ITAA 1936.

However, the amount assessable under subsection 99B(1) of the ITAA 1936 does not include amounts listed under subsection 99B(2) of the ITAA 1936.

A withdrawal of an amount that represents amounts deposited by you, would come within paragraph 99B(2)(a) of the ITAA 1936.

Distributions, to the extent that they come within subsection 99B(2) of the ITAA 1936, would be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936.

Only the income accumulated in the Fund paid to you as a resident taxpayer that is normally taxable in Australia and had not been previously subject to tax in Australia would be assessable to you under subsection 99B(1) of the ITAA 1936.

In this case, it is the gross amount withdrawn, converted to Australian dollars, less the amount that represents your deposits, converted to Australian dollars, that is the amount assessable under subsection 99B(1) of the ITAA 1936.

Amounts assessable under subsection 99B(1) of the ITAA 1936 form part of your assessable income under subsection 6-10(4) of the ITAA 1997.

Foreign income tax offset (FITO)

Subsection 770-10(1) of the ITAA 1997 provides that FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for the income year, only a proportionate share of the foreign income tax paid (the share that corresponds to the part that is assessable income) will count towards the tax offset.

Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains (subsection 770-15(1) of the ITAA 1997). The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

However, section 770-140 of the ITAA 1997 will deem you not to have paid foreign income tax to the extent that you or any other associated entity become entitled to a refund of the foreign income tax .

In your case, you will be entitled to claim a FITO for tax paid in the foreign country in relation to that portion of your withdrawals that are assessable in Australia; and conversely, the tax withheld in relation to the withdrawal of your contributions will not be eligible for FITO.