Edited version of private advice

Authorisation Number: 1052247584683

Date of advice: 11 December 2024

Ruling

Subject: Application of section 102AAM of the Income Tax Assessment Act 1936

Question 1

Will an interest charge under section 102AAM of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the taxable component under section 99B(1) of the ITAA 1936 of accumulated earnings of the Fund, since the inception of the Fund, if a withdrawal of Fund amounts was made in the future?

Answer 1

Yes

Question 2

Will an interest charge under section 102AAM of the ITAA 1936 apply to the amount wholly reduced under subsection 99B(2)(a) of the ITAA 1936 being the non-taxable component of your Fund, since the inception of the Fund, if a withdrawal is made in the future?

Answer 2

No.

Question 3

Does the 'profit' element, within subsection 102AAM(7) of the ITAA 1936, crystalise in the year of distribution such that the interest charge in section 102AAM of the ITAA 1936, only applies to the 'profit' element in the year the distribution is made and in the context of the Fund being registered and administered in a listed country?

Answer 3

Yes.

This ruling applies for the following period:

XX July 20XX to XX June 20XX

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

You became an Australian resident for tax purposes on XXXX.

On XXXX your Fund commenced.

The Fund is a non-resident 'foreign investment trust' for the purposes of Australian Taxation Laws and you are the beneficiary of the Fund.

The Fund is administered by a foreign corporate body in a foreign country.

You intend to start accessing the Fund based on the outcome of this ruling as you are nearing retirement age.

You intend to receive 'Accumulated Earnings' derived since the inception of the Fund, and 'Corpus' from the Fund consisting only of funds you or an employer have contributed.

You only have one investment type in the Fund described as a shareholding in one large managed pool of Fund assets.

The Fund does not directly hold actual individual listed shares or individual units in listed investment trusts but rather a small shareholding of a very large pool of listed investments.

The Fund has a total market capitalisation of XXXX, of which your holdings are, a small amount of the total fund value.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 section 102AAM

Income Tax Assessment Act 1936 subsection 102AAM(1)

Income Tax Assessment Act 1936 subsection 102AAM(7)

Taxation Administration Act 1953 section 8AAD

Assumptions

The Fund is a not a foreign superannuation fund for Australian taxation laws.

The non-taxable component referred to is corpus amounts that are assessable under section 99B(1) of the ITAA 1936 that are wholly reduced from assessable income by subsection 99B(2)(a) of the ITAA 1936.

Summary

Future withdrawals of the accumulated earnings since the inception of the Fund, will be subject to an interest charge under section 102AAM of the ITAA 1936.

Withdrawn amounts wholly reduced by amounts characterised as corpus under subsection 99B(2) of the ITAA 1936 will not be subject to the interest charge.

Unrealised capital gains will not be included in the calculation of profit in subsection 102AAM(7). Instead, any capital profits will only be realised upon the sale of the relevant asset as that is when the amount will be included in your assessable income under section 99B of the ITAA 1936.

Detailed reasoning

An interest charge applies in relation to amounts that are included in assessable income commencing 1 July 1990 or subsequent years of income (e.g., the current year of income) under subsection 99B(1) of the ITAA 1936.

Subsection 99B(1) of the ITAA 1936, includes in the assessable income of a beneficiary of a foreign trust estate who was a resident at any time in a year of income, certain amounts, being property of a trust estate, that are paid to, or applied for the benefit of, the beneficiary in that year of income. This is the case for amounts that have not previously been subject to tax in Australia either in the hands of a trustee or a beneficiary.

Section 102AAM of the ITAA 1936, sets out the circumstances under which an interest charge, is to be imposed on distributions received by a resident beneficiary from a non-resident trust estate that has not previously been subject to taxation in Australia. Section 102AAM of the ITAA 1936, also provides the rules for calculating the interest charge.

The interest charge calculated is intended to compensate the Australian revenue for deferral of Australian tax on any accumulated income which was not taxed in the year it was derived.

The interest charge is calculated under paragraph 102AAM(5)(a) of the ITAA 1936 and may apply to distribution of earnings from a non-resident trust estate where the earnings are the result of profit:

•                Referable to eligible designated concession income derived in an income year when the trust was a resident of a listed country, or

•                Not subject to tax in a listed country and were derived in an income year when the trust was a resident of an unlisted country.

In your case the relevant country is a listed country under regulation 19 of the Income Tax Assessment (1936) Act Regulations 2015.

Clarification of section 102AAM calculation

The portion of the distributed amount of the non-resident trust's year of income, is calculated under subsection 102AAM(5) of the ITAA 1936, by using the formula in paragraph 102AAM(3)(b) of the ITAA 1936.

Subparagraph 102AAM(1)(b)(i)operates to enact subsection 102AAM(7) of the ITAA 1936, which is the provision that will determine the amount to be included in the assessable income of the beneficiary.

Section 102AAM interest charge accrues as follows:

•                where the trust distribution is paid out of trust income or profits accumulated before 1990-91, the charge will accrue from the start of the beneficiary's 1990-91 income year.

•                where the trust distribution is paid out of trust income accumulated by the non-resident trust estate in the 1990-91 or a subsequent income year, the charge will accrue from the start of the beneficiary's next income year: that is, the income year first following the income year of the trust estate for which the income would have been included in the assessable income of the trust if the trust had been a resident trust estate.

The interest charge in section 102AAM of the ITAA 1936, will cease to accrue on the last day of the income year in which the distributed amount is included in the assessable income of the beneficiary.

The rate of interest that applies from XX September 20XX is the applicable rate under section 8AAD of the Taxation Administration Act 1953. The applicable rates of interest prior to XX September 20XX are:

•                from XXJuly 19XX until XX September 20XX, the rate applying under section 214A of the ITAA 1936

•                from XX July 19XX until XX June 19XX, the rate applying under section 214A of the ITAA 1936 less four (4) percentage points

•                before XX July 19XX, the rate applying under section 10 of the Taxation (Interest on overpayments) Act 1983.

Subsection 102AAM(7) of the ITAA 1936

Subsection 102AAM(7) states the following:

For the purposes of this subsection, the extent to which an amount (in this subsection called the section 99B amount) included in the assessable income of a taxpayer of a year of income under section 99B in relation to a trust estate is attributable to an amount (in this subsection called the trust amount ) covered by subparagraphs102AAM(1)(b)(i) or (ii) is to be determined in accordance with the following paragraphs:

(a) in all cases - distributions of income and profits of the trust estate are to be taken to have been made in the following order:

(i) first, from income and profits of the earliest non-resident year of income;

(ii) then, successively from income and profits of successive subsequent years of income;

(b) if subparagraph (1)(b)(i) applies - the extent to which the amount (in this paragraph called the adjusted section 99B amount), being so much of the section 99B amount as is attributable to the income and profits of the trust estate of the non-resident trust's year of income, represents eligible designated concession income in relation to any listed country in relation to the non-resident trust's year of income is calculated using the following formula:

Adjusted

section 99B × Eligible designated concession income

amount Total income

where:

Adjusted section 99B amount means the adjusted section 99B amount (see above)

Eligible designated concession income means the number of dollars in the amount, being so much of the income and profits of the trust estate of the non-resident trust's year of income as represents eligible designated concession income in relation to any listed country in relation to the non-resident trust's year of income.

Total income means the number of dollars in the income and profits of the trust estate of the non-resident trust's year of income.

Profits

Profits are defined in section 102AAB of the ITAA 1936 to include gains, whether of an income or capital nature.

Application to your circumstances

Amounts that are included in your assessable income under subsection 99B(1) of the ITAA 1936 that are accumulated earnings since the inception of the Fund will be subject to the interest charge under section 102AAM of the ITAA 1936. Earnings that accrue and are reinvested in your Fund are not subject to Australian tax in the year they are derived and are instead assessable Australian income under section 99B when received by you as an Australian resident taxpayer. As these amounts have not previously been taxed in Australia in the year they were derived, they are subject to the interest charge in section 102AAM of the ITAA 1936.

Amounts that are included in your assessable income under subsection 99B(1) of the ITAA 1936 but are wholly reduced from that assessable income by virtue of having the characteristic of corpus under paragraph 99B(2) (a) of the ITAA 1936 will not be subject to the interest charge under section 102AAM of the ITAA 1936 as they are removed from your assessable amount.

The profit element in subsection 102AAM(7) of the ITAA 1936 will only crystallise when the distribution is received and is included in assessable income. The profits element will not capture unrealised capital gains. It will only capture the proceeds of the sale of a capital asset when the distribution that includes this amount is made assessable under section 99B of the ITAA 1936.

You will need to complete the, section 102AAM of the ITAA 1936 calculation above and include the amount on an additional information schedule when lodging the relevant income tax return. After you lodge, the ATO will confirm your calculation and the amount payable.