Tax Laws Amendment (2007 Measures No. 4) Act 2007 (143 of 2007)

Schedule 1   New foreign income tax offset rules

Part 1   Main amendments

Income Tax Assessment Act 1997

1   After Division 768

Insert:

Division 770 - Foreign income tax offsets

Table of Subdivisions

Guide to Division 770

770-A Entitlement rules for foreign income tax offsets

770-B Amount of foreign income tax offset

770-C Rules about payment of foreign income tax

770-D Administration

Guide to Division 770

770-1 What this Division is about

You may get a non-refundable tax offset for foreign income tax paid on your assessable income.

There is a limit on the amount of the tax offset.

A resident of a foreign country does not get the offset for some foreign income taxes.

You may also get the offset for foreign income tax paid on some amounts that are not taxed in Australia.

770-5 Object

(1) The object of this Division is to relieve double taxation where:

(a) you have paid foreign income tax on amounts included in your assessable income; and

(b) you would, apart from this Division, pay Australian income tax on the same amounts.

(2) To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts.

Subdivision 770-A - Entitlement rules for foreign income tax offsets

Table of sections

Basic entitlement rule for foreign income tax offset

770-10 Entitlement to foreign income tax offset

770-15 Meaning of foreign income tax , credit absorption tax and unitary tax

Basic entitlement rule for foreign income tax offset

770-10 Entitlement to foreign income tax offset

(1) You are entitled to a *tax offset for an income year for *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

Note 1: The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax - even if you paid the foreign income tax in another income year.

Note 2: If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)).

Note 3: For offshore banking units, the amount of foreign income tax paid in respect of offshore banking income is reduced: see subsection 121EG(3A) of the Income Tax Assessment Act 1936.

Taxes paid on section 23AI or 23AK amounts

(2) An amount of *foreign income tax counts towards the *tax offset for you for the year if you paid it in respect of an amount that is your *non-assessable non-exempt income under either section 23AI or 23AK of the Income Tax Assessment Act 1936 for the year.

Note 1: Sections 23AI and 23AK of the Income Tax Assessment Act 1936 provide that amounts paid out of income previously attributed from a controlled foreign company or a foreign investment fund are non-assessable non-exempt income.

Note 2: Foreign income taxes covered by this subsection are direct taxes (for example, a withholding tax on a dividend payment) and not underlying taxes, only some of which are covered by section 770-135.

Exception for certain residence-based foreign income taxes

(3) An amount of *foreign income tax you paid does not count towards the *tax offset for the year if you paid it:

(a) to a foreign country because you are a resident of that country for the purposes of a law relating to the foreign income tax; and

(b) in respect of an amount derived from a source outside that country.

Exception for previously complying funds and previously foreign funds

(4) An amount of *foreign income tax paid by a *superannuation provider in relation to a *superannuation fund does not count towards the *tax offset for the year if:

(a) the tax was paid in respect of an amount included in the fund's assessable income under table item 2 or 3 in section 295-320; and

(b) the provider paid the tax before the start of the income year.

Note: Table items 2 and 3 in section 295-320 include additional amounts in the assessable income of superannuation funds that change their status from complying to non-complying or from foreign to Australian.

Exception for credit absorption tax and unitary tax

(5) An amount of *credit absorption tax or *unitary tax you paid does not count towards the *tax offset for the year.

770-15 Meaning of foreign income tax , credit absorption tax and unitary tax

(1) Foreign income tax means tax that:

(a) is imposed by a law other than an *Australian law; and

(b) is:

(i) tax on income; or

(ii) tax on profits or gains, whether of an income or capital nature; or

(iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

(2) Credit absorption tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country to the extent that the tax would not have been payable if the entity concerned or another entity had not been entitled to an offset in respect of the tax under this Division.

(3) Unitary tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country, being a law which, for the purposes of taxing income, profits or gains of a company derived from sources within that country, takes into account, or is entitled to take into account, income, losses, outgoings or assets of the company (or of a company that for the purposes of that law is treated as being associated with the company) derived, incurred or situated outside that country, but does not include tax imposed by that law if that law only takes those matters into account:

(a) if such an associated company is a resident of the foreign country for the purposes of the law of the foreign country; or

(b) for the purposes of granting any form of relief in relation to tax imposed on dividends received by one company from another company.

Subdivision 770-B - Amount of foreign income tax offset

Guide to Subdivision 770-B

770-65 What this Subdivision is about

The amount of your tax offset is based on the amount of foreign income tax you have paid.

However, there is a limit on the maximum amount of your offset. The limit is the greater of $1,000 and an amount worked out under this Subdivision. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreign-taxed and foreign-sourced income and related deductions were disregarded.

You may choose to use the limit of $1,000 and not work out this amount.

There is an increase in the limit to ensure foreign income tax paid on some amounts that are not taxed always forms part of the offset.

Table of sections

Operative provisions

770-70 Amount of foreign income tax offset

770-75 Foreign income tax offset limit

770-80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply

Operative provisions

770-70 Amount of foreign income tax offset

The amount of your *tax offset for the year is the sum of the *foreign income tax you paid that counts towards the offset for the year.

Note 1: The amount of foreign income tax you paid may be affected by Subdivision 770-C.

Note 2: The amount of the offset might be increased under section 770-230 of the Income Tax (Transitional Provisions) Act 1997, if you have pre-commencement excess foreign income tax.

770-75 Foreign income tax offset limit

(1) There is a limit (the offset limit ) on the amount of your *tax offset for a year. If your tax offset exceeds the offset limit, reduce the offset by the amount of the excess.

(2) Your offset limit is the greater of:

(a) $1,000; and

(b) this amount:

(i) the amount of income tax payable by you for the income year; less

(ii) the amount of income tax that would be payable by you for the income year if the assumptions in subsection (4) were made.

Note 1: If you do not intend to claim a foreign income tax offset of more than $1,000 for the year, you do not need to work out the amount under paragraph (b).

Note 2: The amount of the offset limit might be increased under section 770-80.

(3) For the purposes of paragraph (2)(b), work out the amount of income tax payable by you, or that would be payable by you, disregarding any *tax offsets.

(4) Assume that:

(a) your assessable income did not include:

(i) so much of any amount included in your assessable income as represents an amount in respect of which you paid *foreign income tax that counts towards the *tax offset for the year; and

(ii) any other amounts of *ordinary income or *statutory income from a source other than an *Australian source; and

(b) you were not entitled to any deductions that:

(i) are *debt deductions that are attributable to an *overseas permanent establishment of yours; or

(ii) are other deductions that are reasonably related to income covered by paragraph (a) for that year.

Note: You must also assume you were not entitled to any deductions for certain converted foreign losses: see section 770-35 of the Income Tax (Transitional Provisions) Act 1997.

Example: If an entity has paid foreign income tax on a capital gain that comprises part of its net capital gain, only that capital gain on which foreign income tax has been paid is disregarded.

770-80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply

Your offset limit under subsection 770-75(2) is increased by any amounts of *foreign income tax that count towards the *tax offset for you for the year because of subsection 770-10(2).

Subdivision 770-C - Rules about payment of foreign income tax

Table of sections

Rules about when foreign tax is paid

770-130 When foreign income tax is considered paid - taxes paid by someone else

770-135 Foreign income tax paid by CFCs and FIFs on attributed amounts

Rules about when foreign tax is considered not paid

770-140 When foreign income tax is considered not paid - anti-avoidance rule

Rules about when foreign tax is paid

770-130 When foreign income tax is considered paid - taxes paid by someone else

(1) This Act applies to you as if you had paid an amount of *foreign income tax in respect of an amount (a taxed amount ) that is all or part of an amount included in your *ordinary income or *statutory income if you are covered by subsection (2) or (3) for an amount of foreign income tax paid in respect of the taxed amount.

(2) You are covered by this subsection for an amount of *foreign income tax paid in respect of a taxed amount if that foreign income tax has been paid in respect of the taxed amount by another entity under an *arrangement with you or under the law relating to the foreign income tax.

Example: You are a partner in a partnership and the partnership pays foreign income tax on the partnership income.

(3) You are covered by this subsection for an amount of *foreign income tax paid in respect of the taxed amount to the extent that:

(a) the taxed amount is taken, because of section 6B of the Income Tax Assessment Act 1936 (the 1936 Act ), to be attributable to another amount of income of a particular kind or source; and

(b) foreign income tax has been paid in respect of the other amount of income; and

(c) the taxed amount is less than it would have been if that tax had not been paid.

Example: Aust Co (an Australian resident) is the sole beneficiary of an Australian resident trust H and is presently entitled to all the income of trust H. Trust H owns shares in For Co (a foreign company). For Co pays a dividend to trust H and the dividend is subject to withholding tax in For Co's country of residence.

Trust H allocates to Aust Co, the dividend, as well as other Australian source income trust H earned in the year (none of which was subject to foreign income tax). Aust Co is treated as having paid the foreign income tax paid by For Co under subsection 770-130(3). The foreign income tax is treated as paid in respect of the amount included in Aust Co's assessable income that is attributable to the dividend.

770-135 Foreign income tax paid by CFCs and FIFs on attributed amounts

(1) This Division applies to an entity as if it had paid an amount of *foreign income tax worked out under subsection (7) in respect of an amount included in its assessable income if:

(a) the amount is included in its assessable income as described in subsection (2); and

(b) the conditions in subsections (3), (5) and (6) are satisfied.

(2) An amount is included in an entity's assessable income as described in this subsection if:

(a) the entity is a company and the amount is included under:

(i) section 456 (a section 456 case ) of the 1936 Act in relation to a *CFC and a statutory accounting period; or

(ii) section 457 (a section 457 case ) of that Act in relation to a CFC; or

(iii) section 529 of that Act in relation to a foreign company (within the meaning of Part XI of that Act) (a foreign company case ) in respect of a notional accounting period (within the meaning of that Part) (a notional accounting period ); or

(b) the amount is included under section 529 of that Act in relation to a foreign trust (within the meaning of Part XI of that Act) (a foreign trust case ) in respect of a notional accounting period.

Note: Section 456 of the 1936 Act includes, in the assessable income of certain Australian shareholders, amounts that are attributable to the profits of an Australian-controlled foreign company.

Section 457 does likewise when a controlled foreign company changes residence from an unlisted to a listed country or to Australia.

Section 529 includes, in the assessable income of resident taxpayers, amounts that are attributable to FIF interests held in foreign companies and in foreign trusts.

Tax paid condition

(3) An amount of *foreign income tax, income tax or *withholding tax (the tax amount ) must have been paid:

(a) for a section 456 case - by the *CFC in respect of an amount included in the notional assessable income of the CFC for the statutory accounting period; or

(b) for a section 457 case - by the CFC; or

(c) for a foreign company case or a foreign trust case - by the foreign company or foreign trust in respect of an amount included in its notional income (within the meaning of Part XI of the 1936 Act) of the notional accounting period.

Note: Section 770-130 deems foreign income tax to have been paid in certain circumstances.

(4) For the purposes of paragraphs (3)(a) and (b), the tax amount includes an amount that is taken to have been paid by the *CFC under subsection 393(4) of the 1936 Act (about tax paid on reinsurance premiums).

Association condition

(5) If the entity is a company, it must have an *attribution percentage of 10% or more:

(a) for a section 456 case - in relation to the *CFC at the end of the statutory accounting period; or

(b) for a section 457 case - in relation to the CFC at the residence-change time (within the meaning of section 457 of the 1936 Act); or

(c) for a foreign company case - at the end of the notional accounting period.

Note: There is no association condition for a foreign trust case.

Calculation method condition for FIFs

(6) For a foreign company case and a foreign trust case, the amount included under section 529 of the 1936 Act must have been determined by the application of the calculation method set out in Subdivision D of Division 18 of Part XI of that Act (the calculation method ).

Amount of foreign income tax

(7) The amount worked out under this subsection is:

(a) for a section 456 case - the sum of all the tax amounts for the statutory accounting period multiplied by the company's *attribution percentage in relation to the *CFC at the time mentioned in paragraph (5)(a); or

(b) for a section 457 case - the sum of all the tax amounts to the extent they are attributable to the amount included in the company's assessable income under section 457 of the 1936 Act; or

(c) for a foreign company case or a foreign trust case - an amount worked out using the following formula:

Sum of all the tax amounts for the national accounting period x (Entity's share of calculated profit / FIF's calculated profit)

where:

entity's share of calculated profit means the share of the calculated profit of the foreign company or foreign trust in respect of the notional accounting period to which the entity is entitled as determined under the calculation method.

FIF's calculated profit means the calculated profit of the foreign company or foreign trust in respect of the notional accounting period as determined under the calculation method.

Grossing-up of attributed amount

(8) For the purposes of this Act except this section and:

(a) section 371 of the 1936 Act (for a section 456 case or a section 457 case); or

(b) section 605 of that Act (for a foreign company case or a foreign trust case);

the amount included in the entity's assessable income as described in subsection (2) is taken to be increased by the amount of tax worked out under subsection (7).

Note: Section 371 of the 1936 Act records an amount in an attribution account when the amount is included in the assessable income of an attributable taxpayer in relation to a CFC. Section 605 does the same thing for taxpayers with interests in FIFs.

Rules about when foreign tax is considered not paid

770-140 When foreign income tax is considered not paid - anti-avoidance rule

Despite anything else in this Division, this Act applies to you as if you had not paid an amount of *foreign income tax to the extent that you or any other entity become entitled to:

(a) a refund of the foreign income tax; or

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

Subdivision 770-D - Administration

Table of sections

770-190 Amendment of assessments

770-190 Amendment of assessments

(1) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment for the purpose of giving effect to this Division for an income year if:

(a) an event described in subsection (2) (an amendment event ) happens after the time you lodged your *income tax return for that year; and

(b) the amendment is made at any time during the period of 4 years starting immediately after the amendment event.

Note: Section 170 of that Act specifies the periods within which assessments may be amended.

(2) The following are amendment events:

(a) you pay an amount of *foreign income tax that counts towards your *tax offset for the year;

(b) there is an increase in an amount of foreign income tax you paid that counts towards your offset for the year;

(c) there is a reduction in an amount of foreign income tax you paid that counts towards your offset for the year.