Edited version of your written advice

Authorisation Number: 1051354552925

Date of advice: 4 April 2018

Ruling

Question 1

Is any part of a lump sum received from a foreign fund assessable as ordinary income?

Answer

Yes

Question 2

Are you entitled to claim a tax credit for the tax withheld by the overseas revenue agency in respect of a lump sum payment from a foreign fund?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 2018

The scheme commenced on:

1 July 2017

Relevant facts and circumstances

You became a resident of Australia for taxation purposes.

You have an account with a foreign fund in a wealth management firm.

This wealth management firm was established in overseas and has their central management and control overseas.

You intend to transfer the balance to an Australian Fund.

An amount transferred from the foreign fund to an Australian Fund is subject to 15% withholding tax.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 subsection 6-10(4)

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 section 770-70

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 subsection 99B(2)(a)

Income Tax Assessment Act 1936 subsection 99B(2)(b)

Income Tax Assessment Act 1936 subsection 99B(2)(c)

Reasons for decision

Question 1

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)).

The transfer from the foreign fund would not be 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) 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:

● the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)

● amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and

● amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936).

Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).

In this case the transfer from the foreign fund is assessable under subsection 99B(1) of the ITAA 1936, subject to the exclusions under subsection 99B(2) of the ITAA 1936.

Question 2

A foreign income tax offset is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.

Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset (FITO) arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

When claiming a FITO, you are required to gross up your income for the foreign tax paid (or which is taken to have been paid) in respect of that income.

The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997).

The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source.

If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap.