When foreign income tax is not treated as paid by the taxpayer



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A taxpayer is not entitled to a tax offset for foreign income tax to the extent they, or any other entity, are entitled to:

  • a refund of the foreign tax, or
  • any other benefit worked out by reference to the amount of foreign income tax (other than a reduction in the amount of the foreign income tax).

The entitlement to a benefit may arise from the exploitation of arbitrage opportunities resulting from mismatches in debt and equity classifications and the different status granted to foreign hybrid entities (for example, where an enhanced yield is obtained by a taxpayer entering into a structured financing arrangement).

However, the taxpayer may still be entitled to a tax offset where the only benefit is a reduction in the tax liability of the taxpayer or another entity, such as provided by an imputation credit, a rebate of tax or a similar type of concession, provided that the concession does not result in a refund to the taxpayer or other entity.


In a foreign country, Austco derives net rental income on which income tax of $50,000 is paid in that country.

Austco later finds out that it is entitled to a special concession in the foreign country, under which the $50,000 is fully refunded. Accordingly, Austco is taken to not have paid foreign income tax on that income.

Last modified: 23 Jul 2009QC 22894