Edited version of private advice

Authorisation Number: 1052066313919

Date of advice: 19 December 2022

Ruling

Subject: Foreign trust distribution

Question 1

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

Answer

Yes.

Question 2

Will future withdrawals as a resident Australian taxpayer from the new retirement account be subject to income tax under section 99B of the ITAA 1936?

Answer

Yes.

Question 3

Are you entitled to receive a foreign income tax offset (FITO) for income tax paid in the foreign country on withdrawal of the funds?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for tax purposes.

You first relocated to the Country X in 20XX.

For the period between 20XX to 20XX you were a non-resident of Australia for Australian tax purposes, you were a tax resident of Country X and were employed in Country X.

In respect of your Country X employment, you contributed to a retirement plan.

The retirement plan is recognised as Country X retirement plan.

In 20XX while still a resident of Country X (non-tax resident of Australia), you rolled over the balance of your retirement funds into a new retirement plan. The balance of the rolled over amount in 20XX was approximately $XXX.

You relocated to Australia in XXX 20XX and became an Australian resident for tax purposes from this date.

You intend to withdraw an amount from your Country X retirement plan.

Withdrawals from the plan, which in Country X can be made before retirement age.

You stated that the new retirement plan will not qualify as a 'foreign superannuation fund' for Australian tax purposes and that it will be recognised as a non-resident trust under section 99B of the ITAA 1936.

Withdrawals you make from the new plan will be subject to income tax in the Country X at the time of withdrawal.

The new plan will continue to derive income from its investments in various forms such as interest and or dividends.

The new plan will remain a non-resident trust as none of its trustees are Australian residents for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1997 subsection 295-95(2)

Income Tax Assessment Act 1997 subsection 305-70(2)

Income Tax Assessment Act 1997 subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Superannuation Industry (Supervision) Regulations 1994

Reasons for decision

Question 1

Does the balance of funds rolled over to the new retirement plan from the old retirement fund while a non-resident constitutes a corpus of the new retirement plan for the purposes of section 99B Income Tax Assessment Act 1936 (ITAA 1936)?

Broadly, section 99B of the ITAA 1936 deals with the receipt of trust amounts that have not previously been subject to tax in Australia. It applies where an Australian resident for tax purposes receives an amount from a foreign trust.

Subsection 99B(1) of the ITAA 1936 provides that where a beneficiary who was an Australian resident at any time during an income year is paid an amount 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 in the income year it is paid.

However, subsection 99B(2) of the ITAA 1936 reduces the amount to be included in assessable income under subsection 99B(1) by so much of that amount as represents:

a) corpus of the trust, (but not to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer); or

b) amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; or

c) amounts that are or have been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or that are or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936; or

d) amounts included in assessable income under section 102AAZD of the ITAA 1936 (that is, amounts included under the transferor trust measures for a taxpayer having transferred property or services).

In your case, in 20XX you undertook a transfer of funds held in your old retirement fund to your new account prior to returning to Australia in 20XX. The balance of the rolled over amount in 20XX was approximately $XX.

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

Consequently, the amount of $XX rolled over in 20XX from the old retirement fund to your new one represents corpus of the trust and is excluded from your assessable income in accordance with subsection 99B(2) of the ITAA 1936.

Question 2

Will future withdrawals as a resident Australian taxpayer from the new retirement account be subject to income tax under section 99B of the ITAA 1936?

The assessable income of a resident taxpayer includes income according to ordinary concepts (ordinary income) and 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 section 99B of the ITAA 1936, which deals with trust income not previously subject to tax in Australia and income derived pursuant to section 97.

Section 97 of the ITAA 1936 includes in a person's assessable income distributions of income made by a trust to the person as a beneficiary.

The new retirement plan is a trust estate located in the Country X 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 the new retirement plan, will include in their assessable income, pursuant to section 99B of the ITAA 1936, all amounts paid to them, or applied for their benefit, from the new one, subject to the exclusion contained in paragraph 99B(2)(a) of the ITAA 1936.

Paragraph 99B(2)(a) of the ITAA 1936 applies to you so that:

a)    the proportion of any withdrawal made by you that represents amounts previously deposited to the new plan to settle it or to achieve its purpose is excluded from your assessable income, and

b)    the proportion of any withdrawal made by you that represents earnings of the new plan is included in your assessable income because the new plan earnings are amounts that are not taken to represent corpus; the earnings are attributable to income derived by the new plan, which would have been subject to tax had the earnings been derived by a resident taxpayer.

In your case, any part of the withdrawals that represents amounts deposited by you or your employer will not be included in your assessable income in accordance with subsection 99B(2) of the ITAA 1936. These amounts are considered corpus of the trust, which in your case is $XX and are excluded under paragraph 99(2)(a) of the ITAA 1936.

Paragraph 99B(2)(c) of the ITAA 1936 applies to you so that any withdrawal made by you that is included in your assessable income pursuant to section 97 of the ITAA 1936 is not included in your assessable income under section 99B.

In your case, any part of the withdrawals that represents income derived by the new plan will be included in your assessable income under section 97 of the ITAA 1936 where you meet the conditions in that section.

Therefore, in your case, as you are a resident of Australia for taxation purposes, you will need to include in your assessable income all future withdrawals and amounts paid to you, or applied for your benefit, from the new retirement plan, subject to the exclusion contained in subsection 99B(2) of the ITAA 1936.

Question 3

Are you entitled to receive a foreign income tax offset (FITO) for income tax paid in the Country X on withdrawal of the funds?

Subsection 770-10(1) of the 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 in the income year.

Importantly, Note 1 of subsection 770-10(1) identifies that the offset is for the income year in which your assessable income included an amount in respect of which you paid foreign tax - even if you paid the foreign tax in another year.

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.

Article XX (paragraph (2)) of the double tax agreement with the Country X provides that Australia will allow a credit for Country X tax (other than Country X tax imposed solely by reason of citizenship or by an election by an individual under Country X domestic law to be taxed as a resident of the Country X) on income derived by a resident of Australia from sources in the Country X.

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 the Country X retirement fund that is included in your assessable income under section 99B of the ITAA 1936 in the relevant income year.