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Edited version of your private ruling
Authorisation Number: 1012613759023
Ruling
Subject: Foreign income tax offset
Question and answer:
Is withholding tax deducted from sales occurring in another country allowable as a foreign income tax offset in Australia up to the limit of the foreign income tax offset available under Division 770 of the Income Tax Assessment Act 1997?
Yes.
This ruling applies for the following period:
1 July 2009 to 30 June 2014.
The scheme commenced on:
1 July 2009.
Relevant facts and circumstances:
You are an Australian resident taxpayer.
You produce a product (your product).
You have entered into an agreement (the Agreement) with another entity (the Entity) whereby your product is sold in another country.
The agreement provides for the other country's withholding tax to be withheld by the Entity from the value of the monthly sales of your product in the other country.
The Entity provides you with a statement detailing the value of sales of your product in the other country and the amount of the other country's withholding tax deducted from those sales.
The amount from which the other country's withholding tax is deducted relates only to sales of your product in the other country.
The gross amount from which the other country's withholding tax is deducted is included in your assessable income in Australia.
You are not a resident of the other country for taxation purposes.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 770-10
Income Tax Assessment Act 1997 Section 770-75
Income Tax Assessment Act 1997 Section 770-130
Reasons for decision
The rules surrounding a taxpayer's entitlement to a foreign income tax offset (FITO) are contained in Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997) and include rules about:
• when an entitlement to a FITO exists,
• when foreign income tax is considered to have been paid,
• the circumstances that would deny an entitlement to a FITO, and
• the FITO limit.
Subsection 770-10(1) of the ITAA 1997 provides that you are entitled to a foreign income tax offset (FITO) in an income year if you paid foreign income tax in that year in respect of an amount that is wholly or partly included in your assessable income (in Australia) for the year.
Subsection 770-130(2) of the ITAA 1997 provides that you are taken to have paid an amount of foreign income tax if that foreign income tax is paid (on your behalf) by another entity under an arrangement you have with that entity.
Subsection 770-10(3) of the ITAA 1997 would operate to deny you any entitlement a FITO n relation to foreign income tax that was paid because you are a resident of the foreign country in which the tax was paid and the income giving rise to the foreign income tax was derived from a source outside that foreign country.
Section 770-75 of the ITAA 1997 imposes a limit (the FITO limit) on the amount of FITO you can claim in a year. In simple terms, section 770-75 of the ITAA 1997 provides that:
• if you are claiming a FITO of $1,000.00 or less you can claim the whole amount in your income tax return, and
• if you are claiming a foreign income tax offset of more than $1,000.00, you will need to work out your FITO limit for the year.
Conclusion
Considering the above and the facts of your case, we accept that you are entitled to a FITO in respect of the other country's withholding tax deducted by the Entity from the value of the sales of your product in the other country. The amount of FITO you are entitled to will be limited to the FITO limit calculated under the provisions of section 770-75 of the ITAA 1997.
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