Is section 102AAM interest calculated on section 99B foreign trust distribution income tax deductible in the year incurred?
No. This ruling applies for the following period : Year ended 30 June 20YY The scheme commenced on: 1 July 20YY
Person B received a distribution from a non-resident trust during the year ended 30 June 202X which included income that had accumulated in the foreign trust since 30 June 20YY. Under section 102AAM of the Income Tax Assessment Act 1936 (ITAA 1936), interest was calculated and paid on the Notice of Assessment for the year ended 30 June 20YY. These Notice of Assessments were issued during the year ended 30 June 20YY. Interest was calculated using the formula set out in section 102AAM ITAA 1936 with the effect of imposing interest on the notional tax on the foreign trust's earnings, at the highest individual marginal tax rates, calculated from the year the earnings were received by the foreign trust, up until the year ended 30 June 20YY.
Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 25-5(2)(a) Income Tax Assessment Act 1936 section 99B Income Tax Assessment Act 1936 section 99B(1) Income Tax Assessment Act 1936 section 99B(2) Income Tax Assessment Act 1936 section 102AAM Income Tax Assessment Act 1936 section 102AAM(3)(b) Income Tax Assessment Act 1936 section 102AAM(5)(a) Income Tax Assessment Act 1936 section 102AAM(7) Income Tax Assessment Act 1936 subsection 102AAM(1)(b)(i) Income Tax Assessment Act 1997 subsection 25-5(1)c (repealed) Taxation Administration Act 1953 section 8AAB(4) Does IVA apply to this private ruling? No.
Question 1 Is section 102AAM interest calculated on section 99B foreign trust distribution income tax deductible in the year incurred? Summary No. Based on ATO guidance and private rulings, interest charged under section 102AAM of the Income Tax Assessment Act 1936 (ITAA 1936) is not tax deductible in the year it is incurred. Section 102AAM interest is not deductible and is treated as an additional tax. Detailed reasoning What is interest charged under section 102AAM of the Income Tax Assessment Act 1936? An interest charge applies in relation to amounts that are included in assessable income commencing 1 July 19YY or subsequent years of income (e.g., the current year of income under section 99B(1) of the ITAA 1936. Section 99B(1) of the ITAA 1936, includes in the assessable income of a beneficiary of a foreign trust estate who was a resident at any time in a year of income, certain amounts, being property of a trust estate, that are paid to, or applied for the benefit of, the beneficiary in that year of income. This is the case for amounts that have not previously been subject to tax in Australia either in the hands of a trustee or a beneficiary.
Section 102AAM is part of Division 6AAA and applies to certain distributions from non-resident trust estates. If an amount is included in a taxpayer's assessable income under section 99B, section 102AAM imposes an additionalinterest charge to compensate for the deferral of Australian tax due to the accumulation of income in the trust. Section 102AAM of the ITAA 1936 also provides the rules for calculating the interest charge. The interest charge is calculated under paragraph 102AAM(5)(a) of the ITAA 1936 and may apply to distribution of earnings from a non-resident trust estate where the earnings are the result of profit: • Referable to eligible designated concession income derived in an income year when the trust was a resident of a listed country, or • Not subject to tax in a listed country and were derived in an income year when the trust was a resident of an unlisted country. Section 25 of the Income Tax Assessment Act 1997 Section 25-5(2)(a) precludes the claiming of deductions for tax. These exclusions are designed to prevent the over-deduction of expenses that are not directly related to the taxpayer's tax affairs or obligations.
Section 8-1 of the Income Tax Assessment Act 1997 This section allows taxpayers to deduct losses or outgoings incurred in gaining or producing assessable income, subject to certain conditions. You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Character of interest under102AAMof the Income Tax Assessment Act 1936 Section 995-1 of the ITAA 1997 defines 'tax' as 'income tax imposed by the Income Tax Act 1986 , or imposed as such by any other Act, as assessed under 'this Act''. The term 'this Act' is defined under section 995-1 of the ITAA 1997 and includes the Income Tax Assessment Act 1936 . The term 'assessment' is defined under section 6 of the ITAA 1936 to include 'the ascertainment of the amount of interest payable under section 102AAM'.
The Explanatory Memorandum to the Taxation Laws Amendment (Foreign Income) Bill 1990 provides that 'a distribution by a non-resident trust estate of income of previous years that has neither been attributed to a transferor nor taxed on a current basis to the trustee or a beneficiary, the beneficiary is to be liable... to pay an additional tax in the nature of an interest charge in respect of that amount .' [emphasis added] Interest imposed by section 102AAM of the ITAA 1936 has the character of an amount assessed as it is a compensatory charge for tax deferred where profits are accumulated in a trust. Therefore, amounts assessed under section 99B incur an additional tax in the nature of an interest charge under section 102AAM which meets the definition of 'tax' under the ITAA 1997. Calculation of the interest charge The portion of the distributed amount of the non-resident trust's year of income, is calculated under section 102AAM(5) ITAA 1936, by using the formula in section 102AAM(3)(b) ITAA 1936, set out below: (Distributed amount × applicable rate of tax) - FITO (foreign income tax offset).
The distributed amount is the amount of the distribution that is included in your assessable income under section 99B of the ITAA 1936. This amount is grossed up for any foreign tax you can claim on that share. The applicable rate of tax is the maximum marginal rate that applies for the income year of the taxpayer in which the trust distribution is received. Subparagraph 102AAM(1)(b)(i), operates to enact section 102AAM(7) ITAA 1936, which is the provision that will determine the amount to be included in the assessable income of the beneficiary. The interest charge in section 102AAM ITAA 1936, will cease to accrue on the last day of the income year in which the distributed amount is included in the assessable income of the beneficiary. You are required to complete the section 102AAM calculation and include the amount on an additional information schedule when lodging the relevant income tax return. Application to Person B's circumstances Amounts that are included in Person B's assessable income under section 99B(1) of the ITAA 1936 that are accumulated earnings from the trust will be subject to the interest charge under section 102AAM of the ITAA 1936.
An interest charge under section 102AAM was calculated for Person B for the tax period ending 30 June 202X. A deduction is not allowed under section 8-1 ITAA 1997 as the interest charge is not incurred in gaining or producing Person B's assessable income. A deduction is not allowed under section 25 ITAA 1997 as the interest charge meets the definition of 'tax' under section 995-1 of the ITAA 1997; the Commissioner has no discretion to remit or reduce the amount.