Private ruling: Foreign income
Date of advice: 29 January 2020
Published: March 2020
Ruling period: Income year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Are the payments and income you receive from overseas assessable income? | A1: Yes.

Relevant facts and circumstances: You were born overseas. You have an account with a fund overseas. You and your previous employers made equal contributions to the account on a monthly basis. You became an Australian resident for tax purposes in the early 19X0s. In 201X you were advised by the governing body of the fund that as you are turning 70 you will be eligible for a monthly payment of $X. The amount received from the Fund is not taxed in the overseas country.

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 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 6-10(2) | Income Tax Assessment Act 1997 Subsection 6-10(4) | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1936 Subsection 102AAM(1) | Taxation Administration Act 1953 Section 8AAD

Reasons for decision: Summary: Detailed reasoning The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)). Your withdrawal from the foreign fund would not be ordinary income (subsection 6-5(2) of the ITAA 1997). 'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). Section 10-5 of the ITAA 1997 lists those provisions about statutory income. Included in this list is section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with receipt of trust income not previously subject to tax. 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, that 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 (1) is not to include any amount that represents either: § the corpus of the 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 beneficiaries 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. Thus, 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). ATO ID 2011/93 considers the tax implications when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income. It states that: The trust property paid to the resident beneficiary is attributable to foreign source interest derived by the trust. As interest income would have been assessable had it been derived by a resident taxpayer, and as the interest income has not been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, none of the exclusions in subsection 99B(2) of the ITAA 1936 applies to reduce the amount included in the assessable income of the beneficiary. A question arises however whether the non-resident status of the beneficiary for the period in which the interest was derived by the trust estate in any way alters the outcome under the provision. It is clear from the language of section 99B of the ITAA 1936 ... that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust. Rather, the only explicit condition concerning residency is that the beneficiary be a resident at some time during the year of income in which the trust property is paid to them or applied for their benefit. In your case, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from the foreign fund are assessable under subsection 99B(1) of the ITAA 1936. Any part of the distribution from the retirement service plan that represents amounts deposited by the taxpayer will not be included in the taxpayer's assessable income in accordance with subsection 99B(2) of the ITAA 1936. These amounts are considered the corpus of the trust. Any part of the withdrawal that represents earnings on the corpus of the trust will be assessed under subsection 99B(1) of the ITAA 1936, subject to the exclusions under subsection 99B(2) of the ITAA 1936. | Detailed Reasoning - Interest charge on distributions of accumulated trust income: An Australian resident may be liable to interest under the Taxation (Interest on Non-resident Trust Distributions) Act 1990 , where their assessable income includes an amount from non-resident trust assessed under section 99B of the ITAA 1936. Subsection 102AAM(1) of the ITAA 1936 may make a taxpayer liable to pay interest to the Commissioner, on distributions from certain non-resident trust estates. The interest is calculated on the following amount: (distributed amount × applicable rate of tax) - FTC · "Distributed amount" is the amount included in assessable income of the taxpayer under section 99B of the ITAA 1936 and grossed up by any foreign tax in respect of the distribution. · "Applicable rate of tax" is maximum rate of tax payable by the taxpayer. · "FTC" is the foreign tax credit which is attributable to the amount of the distribution included in the taxpayer's assessable income. The rate of interest is the GIC rate fixed under Section 8AAD of the Taxation Administration Act 1953 less seven percentage points.