Edited version of private advice

Authorisation Number: 1051974789666

Date of advice: 27 April 2022

Ruling

Subject: Foreign trust distribution - section 99B

Question 1

Does the balance of funds rolled over to your new retirement account from the old retirement accounts constitute the corpus of the new account for the purposes of section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is any part of the future withdrawals from the new retirement account assessable as income under section 99B of the ITAA1936?

Answer

Yes

Question 3

Are you entitled to a foreign income tax offset for the income tax paid in the foreign country on withdrawals?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were born in foreign country A and are a citizen of that country.

You hold a permanent residency visa of Australia.

You have returned to Australia to recommence your residency and to live with your family.

You are a resident of Australia for taxation purposes.

Prior to returning to Australia, you undertook a transfer of funds held in your old retirement accounts to your new retirement account.

Your old retirement account is not a foreign superannuation fund for Australian tax purposes.

The new retirement account is a trust estate located in country A and therefore a non-resident trust estate for Australian taxation purposes.

Withdrawals made by you from the new account will be subject to income tax in country A at the time of withdrawal.

You have not made any withdrawals from the new account.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1997 section 770-10

International Tax Agreements Act 1953

Reasons for decision

Question 1

Section 99B of the ITAA 1936 deals with the receipt of trust income that has not previously been subject to tax in Australia.

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.

However, 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 99B(1) is not to include any amount that represents either:

a)    corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income);

b)    ...

c)    an amount:

                      i.        that is or has been included in the assessable income of the beneficiary in pursuance of section 97; or ...

The term 'corpus' is not defined in the legislation; therefore, it takes the ordinary meaning of the term. The Macquarie Dictionary (Online edition 2019) defines 'corpus' to mean a 'principal or capital sum, as opposed to interest or income'.

In your case, you undertook a transfer of funds from your old accounts to a new account prior to returning to Australia.

The rollover of one fund to another, will result in the corpus of the new account equalling the entire balance of your old accounts - there are no Australian tax implications where the rollover occurs prior to assuming tax residency in Australia.

Question 2

Your new retirement account is a trust estate located in country A and therefore a non-resident trust estate for Australian taxation purposes.

A taxpayer who is a resident of Australia for taxation purposes, and who is a beneficiary of such account, will include in their assessable income, pursuant to section 99B, all amounts paid to them, or applied for their benefit, subject to the exclusion contained in subsection 99B(2)(a).

Consequently, the assessable amount is the total amount received less any amounts deposited to the fund (the corpus) by the taxpayer, or on their behalf. The rule is that the taxpayer is taxed only on the earnings of the investment on withdrawal, not on the corpus returned to them. Any earnings in the funds are only assessable in Australia on withdrawal from the funds.

The whole amount of the earnings is assessable in Australia, not just the earnings that accrued from when you became a resident of Australia for taxation purposes.

This is consistent with the Commissioners view in ATO Interpretative DecisionATO ID 2011/93 Income Tax: Application of section 99B of the Income Tax Assessment Act 1936 when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income.

The earnings must be included in your Australian tax return in the year you withdraw the lump sum amount from the account.

Question 3

Section 770-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a foreign income tax offset can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains. 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.

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.

The double tax agreement between country A and Australia provides that Australia will allow a credit for country A tax on income derived by a resident of Australia from sources in country A.

In your case, you will be entitled to claim a foreign income tax offset that corresponds to the foreign tax paid on the proportion of the withdrawals from your new retirement account that is included in your assessable income.