Edited version of private advice

Authorisation Number: 1052332712584

Date of advice: 19 November 2024

Ruling

Subject: Foreign trust distributions

Question 1 - Foreign retirement savings

Will any amounts you withdraw from the overseas fund be assessed under section 99B of ITAA 1936?

Answer 1

Yes.

Question 2 - Foreign Income Tax offset

Can you claim a tax deduction in Australia for any tax paid within the overseas fund?

Answer 2

Yes.

This ruling applies for the following period:

DD MM YY

The scheme commenced on:

DD MM YY

Relevant facts and circumstances

Between the specified dates, you paid contributions into your fund, amount $XXXX (AU$XXXX).

Descriptions of deposits into the retirement plan include employer contribution, employee contribution, vested component, premiums, administration fees.

On DD MM YY, you arrived in Australian and commenced your Australian tax residency.

On DD MM YY, you received a letter from your fund advising of the payment withdrawn from your account of:

•                     $XXXX, including Tax $XXXX.

•                     Total contributions to retirement savings $XXXX / conversion (AUD) $XXXX.

•                     Total received lump sum $XXXX / conversion (AUD) $XXXX.

•                     Tax paid overseas $XXXX / conversion (AUD) $XXXX.

On DD MM YY, you received the funds into your Australian bank account.

Assumptions

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

Relevant legislative provisions

Income Tax Assessment Act 1936, section 99B

Income Tax Assessment Act 1936, paragraph 99B(2)(a)

Income Tax Assessment Act 1997, subsection 770-10(1)

Reasons for decision

Question 1 - Foreign retirement savings

Summary

The fund is considered a foreign trust and the amount paid to you will be subject to tax under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936).

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.

Application to your circumstances

In your case, you received a lump sum payment from the fund which may include amounts that represent the corpus of the trust. The amount that represents corpus includes amounts previously deposited to the fund.

The amount of the lump sum may include amounts that represent earnings. Earnings of the trust are not taken to represent corpus, as the earnings are attributable to income derived by the fund which would have been subject to tax had the earnings been derived by a resident taxpayer.

Therefore, section 99B of the ITAA 1936 applies to you so that:

•                     the proportion of the amounts you have received and that represent amounts previously deposited with the fund by you and your employer are excluded from your assessable income, and

•                     the proportion of the amounts you have received and that represent earnings (from the date you commenced with the fund) are included in your assessable income.

Question 2 - Foreign Income Tax offset

Summary

You are only entitled to claim foreign income tax offset when you paid tax within your fund.

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.

Application to your circumstances

As foreign income tax has been withheld from the income at its source you may be entitled to claim foreign income tax offset in respect of an amount that is included in your assessable income in the income year received.