Edited version of your written advice

Authorisation Number: 1012764141062

Ruling

Subject: Income earned on a foreign bank account

Question 1

Did the Taxpayers' assessable income include any dividends, interest or other amounts paid into the Second Account from assets held in the Second Account pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Did CGT event A1 happen to the Taxpayers when CGT assets held in the Second Account were disposed of during the relevant period?

Answer

No

Question 3

Did CGT event C2 happen to the Taxpayers when CGT assets, such as options and bonds, held in the Second Account came to an end by redemption, expiry or similar means during the relevant period?

Answer

No

Question 4

Did forex realisation event 1 happen to the Taxpayers when foreign currency or rights to receive foreign currency that were held in the Second Account were disposed of during the relevant period?

Answer

No

Question 5

Did forex realisation event 2, 3, 4 or 5 happen to the Taxpayers in relation to any right to receive or obligation to pay foreign currency in relation to the Second Account or the assets held in that account?

Answer

No

Question 6

Did the Taxpayers' assessable income include any amount paid into the Second Account from assets held in that account pursuant to subsection 97(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 7

Were the Taxpayers liable to pay tax under subsection 98(2) of the ITAA 1936 during the relevant period in relation to the Second Account?

Answer

No

Question 8

Were the Taxpayers liable to pay tax under subsection 98(2A) of the ITAA 1936 in relation to the Second Account?

Answer

No

Question 9

Were the Taxpayers liable to pay tax under subsections 99(2) and 99A(4) of the ITAA 1936 in relation to the Second Account?

Answer

No

Question 10

Did the assessable income of the Taxpayers include any amount paid from the Second Account from assets held in that account pursuant to subsection 99B(1) of the ITAA 1936?

Answer

No

Question 11

Does Division 6AAA of Part III of ITAA 1936 apply to the Taxpayers in relation to the Second Account?

Answer

No

Question 12

Did the operative provisions of former Part XI of the ITAA 1936 apply to the Taxpayers in relation to the assets held in the Second Account that were Foreign Investment Funds?

Answer

No

Relevant facts and circumstances

The Taxpayers are the children of X.

The Taxpayers live in City Y, Australia and have resided there since their emigration.

X was born in Country X. He/She currently lives in Country X and has never lived in Australia nor considered himself/herself a resident of Australia for tax purposes.

An account with a foreign Bank ('Bank Z') was opened by X's parent, ('First Account').

In 20XX, X was added as a joint signatory and joint owner of the First Account.

Later that year, X's parent passed away. X became the sole signatory and owner of the First Account.

X was concerned that, as the sole signatory and owner of the First Account, the funds and assets held in the account would be repatriated to Country X in the event of his/her passing away. X wanted the funds and assets held in the First Account to be accessible by his/her executors (The Taxpayers) and distributed according to his/her will without being repatriated.

In April 20XX, a new account was opened ('Second Account'). The account application form was completed with details of The Taxpayers included as account-holders.

X never intended for The Taxpayers to take any ownership interest in the Second Account or in the funds and assets that it held during his/her life. The Second Account was to be owned and operated for his/her benefit only.

X intended for The Taxpayers to access and operate the account, only after he/she had passed away or became incapacitated.

All of the funds and assets held in the First Account were transferred to the Second Account. Following the transfer, the First Account was closed.

At no time did The Taxpayers consider or believe that they were entitled to any of the funds or assets that were kept in the Second Account. They understood that the account was opened and operated solely for the benefit of X during his/her lifetime and was to be distributed according to his/her wishes when he/she passed away.

The assets and funds in the Second Account have been, at all times, invested through Bank Z in cash, term deposits, bonds and managed funds that were issued outside of Australia and Country X.

X wished to confirm his/her sole ownership of the Second Account. He/She decided that the confirmation would be given by having The Taxpayers execute a document titled 'Declaration of Trust'.

The purpose of the 'Declaration of Trust' was to confirm X and The Taxpayers' understanding, and to remove any doubt, that X held the Second Account and assets in that account solely for his/her benefit, and that any interest or involvement that The Taxpayers may have had was solely for X's benefit.

The 'Declaration of Trust' was prepared and executed on AA December 20XX in City Y, Australia.

The Taxpayers never accessed nor took the benefit of any funds held in the Second Account at any time whilst the account was open. The Taxpayers have never received or expected to receive any funds from the account.

In April 20XY, Bank Z informed The Taxpayers that the account would be closed unless confirmation was given that the account was held by a wholesale client.

X decided to close the Second Account and sought to transfer the assets and funds to be held in Australia under a discretionary trust. The trust has a corporate trustee with The Taxpayers as directors.

X prepared and addressed a 'Letter of Wishes' to The Taxpayers in their capacity as directors of the corporate trustee. This document set out his/her intention regarding how the funds were to be held and applied. In particular, the funds are to provide for X's children and grandchildren, subject to his/her current and future financial needs.

The Taxpayers agreed to observe the terms of the letter.

The Second Account was closed and cancelled in July 20XY.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95,

Income Tax Assessment Act 1936 Subsection 97(1),

Income Tax Assessment Act 1936 Subsection 98(2),

Income Tax Assessment Act 1936 Subsection 99A(4),

Income Tax Assessment Act 1936 Subsection 99B(1),

Income Tax Assessment Act 1936 Division 6AAA,

Income Tax Assessment Act 1936 Part XI,

Income Tax Assessment Act 1936 Section 6-5,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 104-25,

Income Tax Assessment Act 1997 Section 775-40,

Income Tax Assessment Act 1997 Section 775-45,

Income Tax Assessment Act 1997 Section 775-50,

Income Tax Assessment Act 1997 Section 775-55 and

Income Tax Assessment Act 1997 Section 775-60.

Reasons for decision

The account application form for the Second Account listed X as the account holder and yourself as additional account holders.

X then transferred funds from the First Account, of which she was the sole owner, to the Second Account.

However, in your respective statement and statutory declarations accompanying the private ruling application, you and X made clear that X has never intended for you to take any ownership interest in the Second Account or funds and assets held in this account, during his/her life.

You and X have also made clear that the account and its assets are to be owned and operated by X and for his/her benefit only.

You declared that you have not accessed, received or expected to receive any fund or benefit from the Second Account while the account was open.

You have also provided in your statutory declarations examples of decisions made by X in relation to the operation of the Second Account:

• The opening of the account and inclusion of you in the account application form as additional account holders,

• Preparation of written records, in the form of 'Declaration of trust', to confirm ownership of the account, and

• Closure of the account.

At the time of closure of the Second Account and subsequent transfer of the account funds to the discretionary trust in Australia, X prepared a letter of wishes setting out how he/she wanted the trust to be operated and that the provision of benefits to his/her children and grand-children would be subjected to his/her current and future needs. You, in your capacity as directors of the corporate trustee, have agreed to observe the terms of this letter.

Statements and actions by you and X have supported and illustrated your intention that the Second Account was to be operated and owned solely for X's benefit.

In Commissioner of Stamp Duties (Qld) v. Jolliffe [1920] HCA 45, Isaacs J cited the decision of Turner L.J. in Milroy v. Lord [1862] EngR 951 in which he said, in the context of a trust, "the transfer of the property becomes effectual in any one of three ways: if the owner (1) actually transfers the property to the beneficiary, (2) transfers it to a trustee for the purposes of the settlement, or (3) declares that he himself holds it in trust for those purposes".

In your circumstances, none of the three transfers mentioned above ever happened. X was the sole legal and beneficial owner of the First Account at the time of its closure and transfer of funds to the Second Account. X is the sole legal and beneficial owner of the Second Account and of the assets and funds held in that account. There was no trust estate in or over the Second Account and the assets and funds held in that account.

Furthermore, as you have no legal or beneficial interest in the Second Account or the assets or funds held in that account, the declarations of trust made by you on BB December 20XX in City Y, Australia were ineffective to create a trust.

Ordinary income amounts

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

'6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

6-5(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.'

In your income tax returns for the financial years ended 30 June 20XX to 30 June 20XY, you declared that you are Australian residents for tax purposes.

As an Australian resident, subsection 6-5(2) of the ITAA 1997 requires you to include in your assessable income ordinary income derived from all sources, in or out of Australia.

The Commissioner has issued Taxation Determination TD 92/182 confirming that where a person is merely a signatory of an account but has no beneficial entitlement to the monies in that account, the person is not liable to taxation on the interest income in respect of that account. As X was the sole legal and beneficial owner of the Second Account, you did not derive any income from that account.

Capital gain events (Sections 104-10 and 104-25 of the ITAA 1997)

As you had no legal or beneficial interest in the Second Account or the assets or funds held in that account, there was no relevant asset to which CGT Event A1 or CGT Event C2 happened.

Forex realisation events (sections 775-40, 775-45, 775-50, 775-55 and 775-60 of the ITAA 1997)

None of Forex realisation events 1 to 5 happened to you, as you had no legal or beneficial interest in the Second Account or the assets or funds held in that account.

Beneficiary of a trust estate (Subsections 97(1) and 99B(1) of the ITAA 1936)

As there was no trust estate over the Second Account or the assets or funds held in that account, there is no income of a trust estate to which subsection 97(1) could apply and there was no property of a trust estate to which subsection 99B(1) could apply.

Trustee of a trust estate (Subsections 98(2), 98(2A), 99(2) and (99A(4) of the ITAA 1936)

As you had no legal interest in or over the Second Account or the assets or funds held in that account, you were not a trustee to which subsections 98(2), 98(2A), 99(2) or 99A(4) could apply.

Attributable taxpayer (Division 6AAA of the ITAA 1936)

As there was no trust estate in or over the Second Account or the assets or funds held in that account there was no trust estate to which section 102AAT of the ITAA 1936 could apply and it follows you are not an entity that is an attributable taxpayer. Therefore, Division 6AAA is not applicable.

Foreign Investment Fund (Part XI of the ITAA 1936)

As there was no trust estate in or over the Second Account or the assets or funds held in that account there was no foreign trust for the purposes of subsection 481(3) of the ITAA 1936. As there was no foreign trust, and hence no FIF,

Part XI of ITAA 1936 is not applicable.