Edited version of your written advice

Authorisation Number: 1012884315351

Date of advice: 25 September 2015

Ruling

Subject: Foreign government premium bonds

Question and answer

Are your foreign government premium bonds cash prizes assessable income?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2015

The scheme commenced on:

1 July 2014

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 an Australian resident.

Some time ago you purchased some foreign government premium bonds.

The bonds are issued in accordance with the foreign country's relevant legislation.

The bonds are issued by an investment body.

Each bond has a unique number.

The bonds do not earn interest but are included in draws each month for cash prizes.

These prizes are free of income tax and capital gains tax in the foreign country.

You have received some cash prizes from these bonds which you have reinvested back into purchasing more foreign government premium bonds.

Relevant legislative provisions:

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 1936 section 26AJ

International Tax Agreements Act 1953

Reasons for decision

The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether inside or outside of Australia (section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Ordinary income is income according to ordinary concepts.

Statutory income is an amount that a provision of the ITAA 1997 or ITAA 1936 specifically provides for as assessable income.

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws, but also any applicable double taxation agreements contained in the International Tax Agreements Act 1953 (Agreements Act).

Schedule X to the Agreements Act contains the double taxation conventions between Australia and the foreign country. Schedule X operates to avoid the double taxation of income received by Australian and foreign country residents.

Article Y of schedule X deals with the taxation of income not addressed by the other Articles of schedule X. Article Y gives Australia taxation rights on income derived in the foreign country by an Australian resident.

Section 10-5 of the ITAA 1997 lists provisions about assessable income. Included in the list is section 26AJ of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with prizes from investment related lottery winnings. The effect of subsection 26AJ(1) of the ITAA 1936 is that where an amount is paid to a taxpayer and:

• the payment is by way of winnings from betting, lottery or another form of gambling or game with prizes,

• the chance to participate in, for example the lottery, was provided wholly or partly in respect of an investment held by the taxpayer in or with an investment body, and

• the lottery or game was organised by the investment body,

then the amount received by the taxpayer is included in their assessable income.

The prize money for government premium bonds in the foreign country meets the requirements of subsection 26AJ(1) of the ITAA 1936. The prize money is the result of the monthly draw which is organised by the investment body.

This amount is therefore statutory income and is included as assessable income under section 6-10 of the ITAA 1997.