Private ruling: Foreign source income
Date of advice: 31 January 2017
Published: July 2017
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Question and answer | 1. Are the lump sum withdrawals from your retirement fund included in your assessable income in Australia? | Yes. | 2. Are you entitled to a foreign income tax offset (FITO) for the tax already paid on the lump sum withdrawals in the overseas country? | Yes.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You have a retirement fund overseas. You have made withdrawals from this account. You have paid tax on these withdrawals in the overseas country.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 paragraph 99B(2)(a) | Income Tax Assessment Act 1936 subsection 481(3) | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 6-10(4) | Income Tax Assessment Act 1997 section10-5 | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Schedule 1 Article 18

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Pension income is ordinary income assessable under subsection 6-5(2) of the ITAA 1997. In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country Y agreement) is listed in section 5 of the Agreements Act. The agreement between Australia and Country Y operates to avoid the double taxation of income received by residents of Australia and Country Y. The Article that is relevant to your situation is Article XX which deals with income not expressly mentioned. Article 21 says: (1) Items of income of a resident of one of the Contracting States which are not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that State. (2) However, if such income is derived by a resident of one of the Contracting States from sources in the other Contracting State, such income may also be taxed in the State in which it has its source. This means that the withdrawn amounts from the fund accounts is taxable in Australia and may be taxed also in Country Y. Article XX of the DTA between Australia and Country Y does not apply to your circumstances as the payments are lump sum payments and this article does not expressly make provision for lump sum payments. A foreign trust is defined in subsection 481(3) of the Income Tax Assessment Act 1936 (ITAA 1936) as a trust which is not an Australian trust, and which did not result from a will or an intestacy in relation to the estate of a deceased person. You have a retirement fund in Country Y. The fund is a personal savings plan that gives you tax advantages for setting aside money for retirement. This account is set up for the exclusive benefit of you or your beneficiaries. The fund is not a superannuation fund for the purposes of the ITAA 1997 and the ITAA 1936 as it allows for withdrawals for pre-retirement purposes. Therefore the fund is not established solely for the provision of retirement benefits. The fund is a foreign trust as defined in subsection 481(3) of the ITAA 1936 and is therefore a foreign investment fund (FIF). | Detailed Reasoning - Repeal of FIF measures: On 14 July 2010, the FIF measures were repealed and do not apply from the 2010-11 income year onwards. If you have an interest in a FIF, you will be subject to the general tax rules applicable to your circumstances - for example, the general tax rules relating to trust income. | Detailed Reasoning - Assessability of trust income: Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes 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 income derived pursuant to section 99B of the ITAA 1936. 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, the 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). Therefore, only income accumulated in the Fund over the years that is normally taxable in Australia and had not been previously subjected to tax in Australia would be assessable to the taxpayer under subsection 99B(1) of the ITAA 1936. For example, if the amounts in the Fund were amounts paid in by the taxpayer and interest earned over the years, all of the interest would be assessable when received by the taxpayer, but not the taxpayer's contributions. You have withdrawn amounts from the fund, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from your fund are assessable under subsection 99B(1) of the ITAA 1936. 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 x 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. | Detailed Reasoning - Foreign Income Tax Offset (FITO): With effect from 1 July 2008, the foreign tax credit (FTC) system has been replaced by the foreign income tax offset (FITO) system contained in Division 770 of the ITAA 1997. Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to a FITO for foreign tax paid in respect of an amount that is included in the person's assessable income in a year of income. It is not necessary that the payment of foreign income tax actually occurs in the claim year. To determine the amount of FITO in any particular year, a person must first calculate the total foreign income tax paid on amounts included in their assessable income for the year. You will need to include your Country Y income in your Australian tax return. The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset. The FITO rules do not allow for the carry forward of excess foreign tax. This means that all available FITO will need to be utilised in the year in which they arise. There will be no opportunity to carry them forward for use against future Australian tax on foreign income. Furthermore, there is a FITO limit. Where the total foreign income tax paid by a person is less than or equal to $1,000, the person is not required to calculate the FITO, i.e. the person's FITO will equal the foreign income tax paid on amounts included in the their assessable income. Where the total foreign income tax paid is more than $1,000, the person can choose to offset only $1,000 of foreign tax (and not formally calculate the FITO entitlement) or calculate the offset limit to determine the maximum FITO entitlement under section 770-75 of the ITAA 1997. You are entitled to a FITO for the tax paid on your withdrawn amounts in Country Y.