Edited version of private advice

Authorisation Number: 1052284753226

Date of advice: 30 August 2024

Ruling

Subject: Individual retirement account

Question 1

Will your Individual Retirement Account (IRA) be taxable in Australia while you are an Australian resident for taxation purposes?

Answer

Yes.

The entirety of your withdrawals from your Roth IRA will be included in your assessable income in the year it is received in accordance with section 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The amounts you contributed overtime to the IRA represent the corpus of the account. These amounts will be removed from your assessable income under subsection 99B (2) of the ITAA 1936.

As a result, you will only be assessed and be liable to pay income tax on the earnings the fund made over time.

Question 2

Are you able to claim a tax deduction in Australia for previous contributions to the IRA?

Answer

No.

You cannot claim a deduction for your contributions to your IRA as these contributions were not expenses incurred in gaining assessable income.

Question 3

Can you claim a tax deduction in Australia for any Country A tax paid within the IRA?

Answer

No.

You are only entitled to claim foreign income tax offset when you have paid tax on your IRA in the Country A. As your withdrawals will be tax-free in the Country A, there will be no corresponding offset applicable in Australia.

This ruling applies for the following period:

DD MM YY

The scheme commenced on:

DD MM YY

Relevant facts and circumstances

You are a Country A and Australian citizen and have been living in Australia full time since the specified date.

You are an Australian resident for taxation purposes.

Over your working career in Country A, you contributed to an individual retirement account (IRA) funded entirely using after tax funds as per IRA rules in Country A.

These deposits were not tax deductible in Country A as per the rules.

As you are of retirement age and held the account for more than XX years withdrawals are tax free in Country A same concept as account based pensions in Australia.

You have not made withdrawals yet but mandatory withdrawals are required at the age of XX.

Assumption

The IRA will not qualify as a 'foreign superannuation fund' for Australian tax purposes and that the IRA will be recognised as a non-resident trust under section 99B of the ITAA 1936.

Question 1

Will the future withdrawals from your Roth Individual Retirement Account (IRA) be taxable in Australia while you are an Australian resident for taxation purposes?

Detailed reasoning

Subsection 99B (1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust who was a resident at any time during the year of income, the amount is to be included in the assessable income of the beneficiary.

Paragraph 99B(2)(a) of the ITAA 1936 reduces the amount to be included in assessable income by any amount that represents the corpus of the trust. This reduction, however, does not apply to amounts that are attributable to income of the trust which would have been included in the assessable income of a resident taxpayer if it had been derived by that taxpayer.

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 taxpayer is taxed only on the earnings of the investment on withdrawal, not on the corpus returned to them. Any earnings in the fund are only assessable in Australia on withdrawal from the fund.

In your case, you will need to include in your assessable income all future withdrawals from your Roth IRA, minus the contributions you made to your IRA over time. That is, you will only be assessed on the earnings of your IRA. It is worth noting that the whole amount of the investment earnings on your IRA is assessable in Australia, not just the earnings that accrued from when you became a resident of Australia for taxation purposes.

Question 2

Are you able to claim a tax deduction in Australia for previous contributions to the IRA?

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for expenses to the extent they are incurred in gaining or producing assessable income.

A deduction will not be allowed under section 8-1 of the ITAA 1997 for expenses which are of a capital, private or domestic nature, where they lack sufficient nexus to employment income production, or if they are incurred in gaining or producing exempt income or where a provision of the tax law prevents it.

In your circumstances, the contributions to your IRA were not expenses incurred in gaining assessable income. Consequently, they are not deductible.

Question 3

Can you claim a tax deduction in Australia for any Country A tax paid within the Roth IRA fund and previous year contributions?

Detailed reasoning

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. Note, 1 of subsection 770-10(1) states 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.

Article 22(2) of the double tax agreement with the Country A provides that Australia will allow a credit for Country A tax (other than Country A tax imposed solely by reason of citizenship or by an election by an individual under Country A domestic law to be taxed as a resident of the Country A) on income derived by a resident of Australia from sources in Country A.

In your case, you have not paid foreign tax paid or will be liable to pay foreign tax on the future withdrawals from the IRA. Consequently, you will not be able to claim a foreign income tax offset.