Edited version of private advice

Authorisation Number: 1052046955746

Date of advice: 19 October 2022

Ruling

Subject: Lump sum payment - foreign company sponsored investment program

Question 1

Will section 99B apply to the liquidation of your interest in a company sponsored investment program in Country B?

Answer

Yes. Section 99B will apply and the lump sum is included in your assessable income.

Question 2

Can you claim a foreign income tax offset for tax paid in Country B on the lump sum payment?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were born in Country B and worked and lived there with your family prior to emigrating to Australia.

Approximately X years ago you became a permanent resident of Australia and have lodged income tax returns in Australia as a resident for tax purposes since then.

Prior to moving to Australia you contributed to a company sponsored investment program in Country B. You have provided a translated copy of the plan. You have made no additional investment to the fund since commencing Australian residency, the value (in Country B currency) has increased in that time.

The investment is subject to concessional tax treatment in Country B provided certain criteria are met.

You have already received a ruling from the ATO confirming that the plan is not a foreign superannuation fund.

You have liquidated your investment and repatriated the funds to Australia.

The investment is subject to concessional tax treatment in Country B provided certain criteria are met. You confirmed that you have paid income tax on the lump sum, in Country B.

Relevant legislative provisions

Section 6-10 Income Tax Assessment Act 1997

Section 10-5 Income Tax Assessment Act 1997

Section 99B Income Tax Assessment Act 1997

Division 770 Income Tax Assessment Act 1997

Reasons for decision

Question 1

Detailed reasoning

Section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the ITAA 1936.

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

•                    the corpus of the included in the beneficiaries income 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 taxpayer's 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. 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).

Application to your circumstances

You are an Australian resident for tax purpose. You received a lump sum from the fund, Pursuant to section 99B, at the time of the withdrawals it is deemed that income has been paid to you or applied for your benefit. Therefore, withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from the fund are assessable under subsection 99B(1) of the ITAA 1936 less any amounts that would fall under subsection 99B(2).

Question 2

Summary

Section 770-10 of the ITAA 1997 provides that you are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

Detailed reasoning

The foreign income tax offset (FITO) provisions are contained in Division 770 of the ITAA 1997. You may get a non-refundable tax offset for foreign income tax paid on your assessable income. There is a limit on the amount of the tax offset. A resident of a foreign country does not get the offset for some foreign income taxes. You may also get the offset for foreign income tax paid on some amounts that are not taxed in Australia.

Under section 770-5, the offset can be applied against your Medicare levy and Medicare levy (fringe benefits) surcharge liability for the year if an amount of it remains after you apply it against your basic income tax liability.

The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax--even if you paid the foreign income tax in another income year.

If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)).

Application to your circumstances

You are an Australian resident for tax purposes and have paid income tax in Country B in relation to the lump sum you received. Either the full lump sum or a portion of the lump sum will be included in your Australian income tax return. You are entitled to claim FITO for the tax paid in Country B. The offset is claimed in the same year that the income is included in your return.