Private ruling: On income earned in a foreign bank account
Published: February 2015

Ruling: Q1: Did the Taxpayer's assessable income include any dividends, interest or other amounts paid into the Account from assets held in the Account pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) ? | A1: No. | Q2: Did CGT event A1 happen to the Taxpayer when CGT assets held in the Account were disposed of during the relevant period? | A2: No. | Q3: Did CGT event C2 happen to the Taxpayer when CGT assets, such as options and bonds, held in the Account came to an end by redemption, expiry or similar means during the relevant period? | A3: No. | Q4: Did forex realisation event 1 happen to the Taxpayer when foreign currency or rights to receive foreign currency that were held in the Account were disposed of during the relevant period? | A4: No. | Q5: Did forex realisation event 2, 3, 4 or 5 happen to the Taxpayer in relation to any right to receive or obligation to pay foreign currency in relation to the Account or the assets held in that account? | A5: No. | Q6: Did the Taxpayer's assessable income include any amount paid into the Account from assets held in that account pursuant to subsection 97(1) of the Income Tax Assessment Act 1936 (ITAA 1936) ? | A6: No. | Q7: Was the Taxpayer liable to pay tax under subsection 98(2) of the ITAA 1936 during the relevant period in relation to the Account? | A7: No. | Q8: Was the Taxpayer liable to pay tax under subsection 98(2A) of the ITAA 1936 in relation to the Account? | A8: No. | Q9: Was the Taxpayer liable to pay tax under subsections 99(2) and 99A(4) of the ITAA 1936 in relation to the Account? | A9: No. | Q10: Did the assessable income of the Taxpayer include any amount paid from the Account from assets held in that account pursuant to subsection 99B(1) of the ITAA 1936? | A10: No. | Q11: Does Division 6AAA of Part III of ITAA 1936 apply to the Taxpayer in relation to the Account? | A11: No. | Q12: Did the operative provisions of former Part XI of the ITAA 1936 apply to the Taxpayer in relation to the assets held in the Account that were Foreign Investment Funds? | A12: No.

Relevant facts and circumstances: The Taxpayer lives in City Y, Australia and has resided there since her/his emigration from Country X in 19GG with her/his spouse. Y is the Taxpayer's father-in-law. Y currently lives in Country X and has never lived in Australia nor considered herself/himself a resident of Australia for tax purposes. In April 20AA, Y opened an account with a foreign bank ('The Account'). Y intended that he would be the Account's sole owner and that the Account would be operated solely for him and her/his benefit. In the account application form, Y included her/his son, who also lives in Country X, and the Taxpayer, as signatories to the account. The account application form also specified that Y was the sole beneficial owner of the Account. Y never intended for the Taxpayer or her/his son to have any interest in the Account. The account application form specified that The Taxpayer and Y's son were additional account holders. Y intended for the Taxpayer and her/his son, on her/his passing away or becoming incapacitated, to access and distribute the contents of the Account as part of her/his estate, to prevent it from being repatriated to Country X. In June 20AA, Y transferred funds from a family trust in Country Z to the Account. The money deposited into the Account has been invested through Bank Z in cash and term deposits outside Australia and Country X. Y wished to confirm herself/himself as the sole beneficial owner of the Account and that the Account was owned by him alone and for her/his sole benefit. Y sought to confirm these things by signing a document titled 'Declaration of Trust' between Y and the Taxpayer and My Y's son. The 'Declaration of Trust' between Y and the Taxpayer was executed in City Y, Australia on CC August 20AB. Y and the Taxpayer understood that the 'Declaration of Trust' confirmed the assets held in the Account belonged to Y and any interest that the Taxpayer may have had was held for Y's benefit absolutely. The Taxpayer never accessed nor took the benefit of any funds held in the Account at any time while it was open. In April 20AD, the foreign bank advised that the Account would be closed unless confirmation was given that it was held by a wholesale client. Y decided that the Account should be closed with the assets and funds transferred to an Australian discretionary trust. The trust has a corporate trustee with the Taxpayer and her/his spouse as directors of the trustee company. Y prepared and addressed a 'Letter of Wishes' to the Taxpayer and her/his spouse in their capacity as directors of the corporate trustee. The letter set out Y's intention for the use of the funds transferred from the Account. In particular, the objective of the funds is to provide for Y's spouse, children and grandchildren subject to the current and future financial need of Y and her/his spouse. The Taxpayer and her/his spouse agreed to observe the terms in the letter. The Account was closed and cancelled in July 20AD.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95, | Income Tax Assessment Act 1936 Subsection 97(1), | Income Tax Assessment Act 1936 Subsection 98(2), | Income Tax Assessment Act 1936 Subsection 99A(4), | Income Tax Assessment Act 1936 Subsection 99B(1), | Income Tax Assessment Act 1936 Division 6AAA, | Income Tax Assessment Act 1936 Part XI, | Income Tax Assessment Act 1936 Section 6-5, | Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Section 104-25, | Income Tax Assessment Act 1997 Section 775-40, | Income Tax Assessment Act 1997 Section 775-45, | Income Tax Assessment Act 1997 Section 775-50, | Income Tax Assessment Act 1997 Section 775-55 and | Income Tax Assessment Act 1997 Section 775-60.

Reasons for decision: Summary: The account application form for the Account listed Y as the account holder and yourself as one of the additional account holders. Funds were transferred from Y's family trust in Country Z into the Account. The account application form specified Y as the sole beneficial owner of the account. Furthermore, in your respective statement and statutory declaration accompanying the private ruling application, you and Y made clear that Y never intended for you to take any ownership interest in the Account or funds and assets held in this account, during her/his life. You and Y have also made clear that the account and its assets are to be owned and operated by Y and for her/his benefit only. You declared that you have not accessed, received or expected to receive any fund or benefit from the Account while the account was open. You have also provided in your statutory declarations examples of decisions made by Y in relation to the operation of the Account: • The opening of the account and inclusion of you in the account application form as one of additional account holders, • Preparation of written records, in the form of 'Declaration of Trust', to confirm ownership of the account, and • Closure of the account. At the time of closure of the Account and subsequent transfer of the account funds to the discretionary trust in Australia, Y prepared a letter of wishes setting out how she/he wanted the trust to be operated and that the provision of benefits to her/his spouse, children and grand-children would be subjected to her/his current and future needs. You, in your capacity as one of the directors of the corporate trustee, have agreed to observe the terms of this letter. Statements and actions by you and Y have supported and illustrated your intention that the Account was to be operated and owned solely for Y's benefit. In Commissioner of Stamp Duties (Qld) v. Jolliffe [1920] HCA 45, Isaacs J cited the decision of Turner L.J. in Milroy v. Lord [1862] EngR 951 in which he said, in the context of a trust, "the transfer of the property becomes effectual in any one of three ways: if the owner (1) actually transfers the property to the beneficiary, (2) transfers it to a trustee for the purposes of the settlement, or (3) declares that he herself/himself holds it in trust for those purposes". In your circumstances, none of the three transfers mentioned above ever happened. Funds were transferred into the Account from a family trust based in Country Z for Y's benefit. Y is the sole legal and beneficial owner of the Account and of the assets and funds held in that account. There was no trust estate in or over the account and the assets and funds held in that account. Furthermore, as you have no legal or beneficial interest in the Account or the assets or funds held in that account, the declaration of trust made by you on CC August 20AB in City Y, Australia were ineffective to create a trust. | Detailed Reasoning - Ordinary income amounts: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states: '6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income. 6-5(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.' In your income tax returns for the financial years ended 30 June 20AE to 30 June 20AF, you declared that you are an Australian resident for tax purposes. As an Australian resident, subsection 6-5(2) of the ITAA 1997 requires you to include in your assessable income ordinary income derived from all sources, in or out of Australia. The Commissioner has issued Taxation Determination TD 92/182 confirming that where a person is merely a signatory of an account but has no beneficial entitlement to the monies in that account, the person is not liable to taxation on the interest income in respect of that account. As Y was the sole legal and beneficial owner of the Account, you did not derive any income from that account. | Detailed Reasoning - Capital gains events (Sections 104-10 and 104-25 of the ITAA 1997): As you had no legal or beneficial interest in the Account or the assets or funds held in that account, there was no relevant asset to which CGT Event A1 or CGT Event C2 happened. | Detailed Reasoning - Forex realisation events (sections 775-40, 775-45, 775-50, 775-55 and 775-60 of the ITAA 1997): None of Forex realisation events 1 to 5 happened to you, as you had no legal or beneficial interest in the Account or the assets or funds held in that account. | Detailed Reasoning - Beneficiary of a trust estate (Subsections 97(1) and 99B(1) of the ITAA 1936): As there was no trust estate over the Account or the assets or funds held in that account, there is no income of a trust estate to which subsection 97(1) could apply and there was no property of a trust estate to which subsection 99B(1) could apply. | Detailed Reasoning - Trustee of a trust estate (Subsections 98(2), 98(2A), 99(2) and (99A(4) of the ITAA 1936): As you had no legal interest in or over the Account or the assets or funds held in that account, you were not a trustee to which subsections 98(2), 98(2A), 99(2) or 99A(4) could apply. | Detailed Reasoning - Attributable taxpayer (Division 6AAA of the ITAA 1936): As there was no trust estate in or over the Account or the assets or funds held in that account there was no trust estate to which section 102AAT of the ITAA 1936 could apply and it follows you are not an entity that is an attributable taxpayer. Therefore, Division 6AAA is not applicable. | Detailed Reasoning - Foreign Investment Fund (Part XI of the ITAA 1936): As there was no trust estate in or over the Account or the assets or funds held in that account there was no foreign trust for the purposes of subsection 481(3) of the ITAA 1936. As there was no foreign trust, there is no FIF and so Part XI of ITAA 1936 is not applicable.