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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051369174393

Date of advice: 11 May 2018

Ruling

Subject: Foreign income tax offsets

Question 1

Are the Social Insurance Fund and Reduction of Emoluments amounts withheld from your salary in Country A considered to be amounts of foreign income tax?

Answer

No.

Question 2

Are you entitled to a foreign income tax offset for the Social Insurance Fund and Reduction of Emoluments amounts withheld from your salary?

Answer

No.

This ruling applies for the following period:

1/07/20XX - 30/06/20XX

The scheme commences on:

3/08/20XX

Relevant facts and circumstances

Income tax in Country A

Country A Social Insurance Scheme

Reduction of Emoluments

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 770-15

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Summary

The Social Insurance Fund and Reduction of Income amounts withheld from your salary in Country A are not considered to be amounts of foreign income tax.

Detailed reasoning

Legal Background

A taxpayer is entitled, under subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997), to a foreign income tax offset in respect of foreign income tax paid on an amount that is included in their assessable income.

Subsection 770-15(1) gives the following definition of foreign income tax:

The requirements to withhold amounts for the Social Insurance Fund and Reduction of Income are imposed by the laws of Country A, which are laws other than an Australian law. However these amounts must also satisfy one of the criteria in paragraph 770-15(1)(b) to meet the definition of ‘foreign income tax’.

The amounts contributed to the Social Insurance Fund and deducted according to the Reduction of Income are not taxes on profits or gains (subparagraph 770-15(1)(b)(ii)). Nor are they taxes subject to a tax treaty (subparagraph 770-15(1)(b)(iii)), as one does not exist between Australia and Country A. Therefore, the determinative issue is whether the amounts meet the definition of ‘tax on income’ under subparagraph 770-15(1)(b)(i).

The definitions of ‘tax’ and ‘income tax’ in section 995-1 of the ITAA 1997 refer to tax imposed under Australian law, and do not assist with the meaning of ‘tax on income’ imposed by a foreign law. Absent a statutory definition, we turn to the ordinary meaning of these words.

The Macquarie Dictionary (online) defines ‘tax’ as:

and ‘income tax’ as:

noun 1. a tax levied on incomes.

The Oxford Dictionary (online) defines ‘tax’ as:

and ‘income tax’ as:

noun 1. Tax levied directly on personal income.

In Re Applicant and the FC of T [2014] AATA 961 (Case 8/2014), the AAT considered whether the taxpayer, an Australian citizen who had been employed in Ireland for 12 months, could claim a foreign income tax offset under s 770-10(1) for compulsory contributions of Pay Related Social Insurance (PRSI) deducted from his Irish salary. At issue was whether these contributions constituted a “substantially similar tax” to Irish income tax for the purposes of Article 2(2) of the double taxation treaty between Ireland and Australia. This case was decided in relation to that article of the treaty for the purposes of determining whether subparagraph 770-15(1)(b)(iii) was satisfied. Although the case is not directly on point, it does give guidance on what factors are relevant in determining what is “substantially similar” to an income tax. In finding that PRSI was not a “substantially similar tax” to Irish income tax, Deputy President FJ Alpins set out the following factors at paragraphs 67 and 68:

Taxation Ruling No. IT 2437 Income Tax: Foreign tax credit system - foreign taxes eligible for credit against Australian income tax (IT 2437) gives the following guidance as to the meaning of “foreign tax” for the purposes of the former section 6AB in the Income Tax Assessment Act 1936 (ITAA 1936):

IT 2437 relates to the now-repealed foreign tax credit system as provided for in the former section 6AB in the ITAA 1936. This has been replaced by the foreign income tax offset system in Division 770 of the ITAA 1997. However, the concept for “foreign income tax” applies to the foreign income tax offset system as it did to the foreign tax credit system, and so IT 2437 is of assistance in interpreting the meaning of “foreign income tax” in Division 770.

The Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 4) Bill 2007, the Bill which introduced Division 770 into the ITA 1997, gives a comparison of the old foreign tax credit system and the new foreign income tax offset system.

New law

Current law

A tax offset is only available for foreign income tax paid on an amount included in assessable income.

A foreign tax credit is only available for foreign tax paid on assessable foreign income.

Foreign income tax is a tax imposed by a law, other than an Australian law, on income, profits or gains.

The taxpayer must have paid the foreign income tax before an offset is available. An offset will not be available for credit absorption taxes or unitary taxes.

Foreign tax is a tax imposed by a law of a foreign country on income, profits or gains (excluding credit absorption taxes and unitary taxes).

The taxpayer must have paid and have been personally liable for the foreign tax before credit entitlement accrues.

This comparison confirms that the definitions of “foreign income tax” and “foreign tax” for the purpose of Division 770 and the former section 6AB are consistent.

Analysis

Contributions to the Country A Social Insurance Fund (CSIF)

In considering contributions to the CSIF in light of the factors listed in Case 8/2014, as extracted above, it is clear that they are not a “tax on income”:

All of these factors indicate that contributions to the CSIF are not a “tax on income”.

As such, contributions to the CSIF do not meet the definition of foreign income tax as per subsection 770-15(1).

Reduction of Emoluments (ROE)

The ROE was implemented as a scaled reduction of the incomes of the public sector, in an effort to alleviate Country A’ budget deficit. It is a reduction in government spending, not a tax on income. The ROE only applied to the public sector with no private sector, or self-employed equivalent law.

Considering the ROE in light of the factors listed in Case 8/2014 also supports the conclusion that the ROE is not a “tax on income”:

Further, the ROE is deducted from a person’s assessable income in calculating their income tax. The ROE was not considered a payment of income tax under the relevant legislation in Country A.

All of these factors indicate that the ROE is not a “tax on income”.

As such, the ROE does not meet the definition of a foreign income tax as per subsection 770-15(1).

Conclusion

The Social Insurance Fund and Reduction of Emoluments amounts withheld from your salary in Country A are not considered to be amounts of foreign income tax for the purposes of the foreign income tax offset.

Question 2

Summary

You are not entitled to a foreign income tax offset for the Social Insurance Fund and Reduction of Emoluments amounts withheld from your salary.

Detailed reasoning

Section 770-10 of the ITAA 1997 provides for the entitlement to a foreign income tax offset. Subsection 770-10(1) states:

A taxpayer will only be entitled to a foreign income tax offset in relation to foreign income tax that they have paid.

As concluded for Question 1, the Social Insurance Fund and Reduction of Emoluments amounts withheld from your salary in Country A are not considered to be amounts of foreign income tax.

As such, you are not entitled to a foreign income tax offset for the Social Insurance Fund and Reduction of Income amounts withheld from your salary.


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