Edited version of private advice

Authorisation Number: 1052111970037

Date of advice: 4 May 2023

Ruling

Subject: Foreign income tax offset

Question 1

Will the taxpayer be able to claim foreign income tax offsets under section 770-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to income distributed to him by the Trust in the income years ended 30 June 20xx and 30 June 20yy?

Answer

Yes.

Question 2

If the answer to Question 1 above is yes, are amounts equivalent to the pre-tax amounts of income of Company A:

• in the sum of (Year 1 pre-tax amount) for the income year ended 30 June 20xx; and
• in the sum of (Year 2 pre-tax amount) for the income year ended 30 June 20yy,

to be included in the taxpayer's assessable income under section 6-1 of the ITAA 1997 for the income years ended 30 June 20xx and 30 June 20yy respectively?

Answer

No.

Question 3

If the answer to Question 1 above is yes, are the foreign income tax offset amounts equal to the aggregate of company income tax and dividends tax paid to the Country B Tax Authority in respect of the amounts distributed to the taxpayer in the income years ended 30 June 20xx and 30 June 20yy?

Answer

No.

Question 4

If the answer to Question 1 above is yes, are amounts equivalent to the amounts of the gross dividends paid by Company A to the Trust:

• in the sum of ($Year 1 gross dividends) amount for the income year ended 30 June 20xx; and
• in the sum of ($Year 2 gross dividends) amount for the income year ended 30 June 20yy,

to be included in the taxpayer's assessable income under section 6-1 of the ITAA 1997 for the income years ended 30 June 20xx and 30 June 20yy respectively?

Answer

Yes.

Question 5

If the answer to Question 1 above is yes, is the taxpayer entitled to foreign income tax offsets under section 770-10 of the ITAA 1997 in the income years ended 30 June 20xx and 30 June 20yy in amounts equal to the amounts of dividends tax paid by Company A to the Country B Tax Authority for the income years ended 30 June 20xx and 30 June 20yy respectively?

Answer

No.

Question 6

If the answer to Question 1 above is yes, is the taxpayer entitled to foreign income tax offsets under section 770-10 of the ITAA 1997 in the income years ended 30 June 20xx and 30 June 20yy in amounts equal to the amounts of dividends tax payable to the Country B Tax Authority for the income years ended 30 June 20xx and 30 June 20yy, respectively, at the rate not exceeding 15% of the gross amount of each dividend paid by Company A to the Trust in accordance with Article 10 of the Country B Double Tax Agreement?

Answer

Yes.

This ruling applies for the following periods:

For the income year ended 30 June 20xx

For the income year ended 30 June 20yy

Relevant facts and circumstances

The taxpayer, an individual, immigrated from Country XX and is a tax resident of Australia. The taxpayer is not a tax resident of Country XX.

The taxpayer is one of XX trustees of a Country B resident trust (Trust) and, is also the beneficiary of this trust. The Trust is a discretionary trust.

One of the assets of the Trust are shares in Company A, which is incorporated in Country B. The Trust's only income are the dividends that it received from Company A.

Company A is a tax resident of Country B. The current board of directors of Company A consists of the taxpayer and Country B residents.

Trust

The trustees of the Trust wholly own Company A. Currently, there are XX trustees of the Trust which include the taxpayer and Country B residents.

Company A's business activities

Company A is a holding company. It has interests in XX Country B companies. Company A's business operations includes the provision of management services to the Country B companies.

The Country B companies conduct XX business activities.

Company A's other business activities include the management of its commercial property portfolio in Country B, and other investments.

The high level and strategic decisions of Company A are deliberated and made at shareholder level by the trustees of the Trust. Company A does not hold directors board meetings. The Trust deed requires unanimous approval by all trustees for any such decision to carry. The directors of Company A are mandated to execute these Trustee (shareholder) decisions to give effect to these decisions.

The taxpayer, an Australian resident, would ordinarily travel to Country B on a regular basis for business matters and to attend shareholder meetings, where high-level strategic decisions of Company A are deliberated and taken. The remainder of the Trustees are permanently resident in Country B.

Some high-level decisions are made in informal meetings through telephonic or electronic means. This in instances where these decisions are to be made expeditiously before the next scheduled Trustee meeting. Unanimous consent is required for a resolution to be passed at these meetings. The decision is then ratified at the next scheduled Trustee meeting in Country B.

Examples of 'high-level decisions' made at the Trustees' meetings were provided and include the following:

•         Exiting and disposal of business assets.

•         Sale of commercial property.

•         Appointment of a trustee, and also replacement director of Company A.

•         Reviewing Annual Financial statements, monitoring progress of various transactions and renumeration of a director.

•         Sale and lease of a business asset.

•         Declaration of dividend and payment to beneficiaries.

Company A's books and share register are all located in Country B. It declares and pays dividends to the Trust from Country B.

Issue of Dividend - Transactions undertaken during 20xx income year

On a specified date in 20xx income year, Company A paid a gross dividend of ($Year 1 gross dividends) amount to the Trust out of its retained earnings. The retained earnings, from which the dividend was funded, have arisen from the taxable profits that were generated over a number of years by Company A and the Country B companies in which it had an interest in.

On payment of the dividend of ($Year 1 gross dividends) amount to the Trust, Company A withheld Country B dividend tax ('dividend tax') at the rate of 20% from the abovementioned dividend payment. The Trust received a net dividend amount of BB amount.

On the same specified dated in 20xx income year, the trustees of the Trust resolved to make an income distribution of BB amount to the taxpayer. The income distribution to the taxpayer was a direct result of the dividend declared by Company A to the Trust on the same date.

Subsequently, the distribution of BB amount was paid to the taxpayer.

In the following month, the amount of dividend tax withheld from (Year 1 gross dividends) amount was paid to Country B Tax Authority.

Transactions undertaken during 20yy income year

On a specified date in 20yy income year, Company A paid a gross dividend to the Trust of ($Year 2 gross dividends) amount. On payment of the dividend to the Trust, Company A withheld Country B dividend tax at the rate of 20% from the abovementioned dividend payment of ($Year 2 gross dividends) amount. The Trust received a net dividend amount of DD amount.

On the same specified dated in 20yy income year, the trustees of the Trust resolved to make an income distribution of DD amount. The income distribution to the taxpayer was a direct result of the dividend declared by Company A to the Trust on the same date.

Subsequently, the distribution of DD amount was paid to the taxpayer. Also, the amount of dividend tax withheld from (Year 2 gross dividends) amount was paid to the Country B Tax Authority.

Relevant legislative provisions

Subsection 6(1) of the Income Tax Assessment Act 1936;

Subsection 6B(1) of the Income Tax Assessment Act 1936;

Subsection 6B(2A) of the Income Tax Assessment Act 1936;

Section 6-1 of the Income Tax Assessment Act 1997;

Section 6-5 of the Income Tax Assessment Act 1997;

Section 6-10 of the Income Tax Assessment Act 1997;

Subsection 770-10(1) of the Income Tax Assessment Act 1997;

Section 770-15 of the Income Tax Assessment Act 1997;

Subsection 770-130(1) of the Income Tax Assessment Act 1997;

Subsection 770-130(3) of the Income Tax Assessment Act 1997;

Reasons for decision

All the legislative references that follow are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

For the reasons set out in relation to the part of this report dealing with Questions 4, Question 5 and Question 6 in the section titled 'Foreign income tax offset for Dividend tax', the taxpayer is entitled to claim a foreign income tax offset amount under section 770-10 for the dividend tax withheld on each dividend distribution from Company A.

This is subject to the amount of the dividend tax not exceeding 15% of the gross amount of the dividend in accordance with Article 10 of the Country B Double Tax Agreement.

For the reasons set out in the part of this report dealing with Question 2 and Question 3 in the section titled 'Foreign income tax offset - Company income tax and Dividend tax' the taxpayer will not be entitled to claim a foreign income tax offset under section 770-10 in respect of the company income tax paid by Company A and its subsidiaries.

Therefore, the taxpayer will not be entitled to claim an amount of foreign income tax offset which is an aggregate of the the dividend tax paid to Country B Tax Authority and the company income tax paid by Company A and its subsidiaries.

Question 4, Question 5 and Question 6 - Foreign income tax offset for Dividend tax

Subdivision 770-A sets out the rules for claiming a foreign income tax offset. Specifically, subsection 770-10(1) provides the following:

'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.'

Therefore, for a taxpayer to be entitled to a foreign income tax offset under subsection 770-10(1), the following requirements must be met:

1.    The tax offset must be for an amount of a foreign income tax;

2.    the taxpayer must have 'paid' an amount of foreign income tax; and

3.    the income or gain on which the taxpayer paid foreign income tax must be paid in respect of an amount included in the taxpayer's assessable income for the income year.

Each of these requirements is discussed below:

Requirement 1 - Foreign income tax

The term 'foreign income tax' is defined in subsection 770-15(1) and means a tax on income that is imposed by a law other than an Australian law.

The note to section 770-15 states that 'foreign income tax' includes only that which has been correctly imposed under the foreign law, or where the foreign jurisdiction has a tax treaty with Australia under the International Tax Agreements Act 1953, the foreign income tax, has been correctly imposed in accordance with that treaty.

In the present circumstances, Country B withholding dividend tax was imposed on dividends paid by Company A, in accordance with the Country B income tax provisions.

It is accepted that the Country B dividend tax is a foreign income tax as it is similar to Australian dividend tax that is imposed in place of a tax on the net amount of income - see ATO publication titled 'Guide to foreign income tax offset rules'.

Country B Agreement

However, as explained in the note to section 770-15, it is also necessary to determine whether the Country B dividend tax was correctly imposed in accordance with the tax treaty that Australia has with Country B (the Country B Agreement).

Article 1

In order for the Country B Agreement to apply, Article 1 of this Agreement states:

'This Convention shall apply to persons who are residents of one or both of the Contracting States.'

A 'person' is defined in Article 3 of Country B Agreement and includes an individual, a company and any other body of persons. The Trust, an intervivos trust, is not a 'person' for the purposes of the Country B Agreement and therefore this Agreement does not apply to the Trust. Company A, a company and the taxpayer, an individual, are 'persons'.

The term 'resident' is defined in Article 4 of the Country B Agreement. A 'resident of a Contracting State' means a person who is a resident of that State for the purposes of its tax. A person will not be a resident of a Contracting State if the person is liable to tax in that State in respect of only income from sources in that State.

Where a 'person' is a resident of Country B and Australia, the tie-breaker rules in Article 4 will apply to allocate residency for the purposes of the Country B Agreement.

The taxpayer, an individual, is a tax resident of Australia. They are not a tax resident of Country B. Therefore, the Country B Agreement applies to the taxpayer.

Company A is a resident of Country B for tax purposes. For the purposes of determining whether the tie-breaker rules in Article 4 apply and, if so, their consequences on the application of the dividends rules in Article 10, consideration will also be given as to whether Company A is also a resident of Australia under the statutory definition of a 'resident' or 'resident of Australia' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The definition of 'resident' or 'resident of Australia' for a company provides three tests to ascertain whether a company is a resident of Australia for income tax purposes. These tests are:

•         it is incorporated in Australia;

•         it both carries on business and has its central management and control in Australia (the CM & C test); or

•         it both carries on business in Australia and has its voting power controlled by shareholders who are 'residents of Australia' (the "voting power" test).

Company A is not incorporated in Australia and therefore, is not an Australian resident under the first test.

In relation to the second test, Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) sets out the Commissioner's view on how to apply the CM&C test of company residency.

In TR 2018/5 at paragraphs 7 and 8, the Commissioner considers that if a company carries on business and has central management and control in Australia, it will carry on business in Australia. As central management and control of a business is part of carrying on the business, it is not necessary that trading or investment operations take place in Australia.

The expression 'central management and control' refers to the control and direction of a company's operations that is, the making of high-level decisions that set the company's general policies and determine the direction of its operations and the type of transactions it will enter - paragraph 11. Paragraph 16 of TR 2018/5 provides examples of acts of central management and control such as setting investment and operational policy and matters of finance.

Conducting day-to-day activities and operations are not ordinarily an act of central management and control (paragraph 12 of TR 2018/5).

Who exercises central management and control?

Normally, where the power to manage a company is given to its directors under its constitution and the company laws rules applicable to that company, the company's directors will control and direct its operations (paragraph 20 of TR 2018/5).

However, identifying which person, or people, exercise a company's central management and control is a question of fact. It will not always be determined solely by identifying who has the legal power or authority to control and direct a company. The crucial question is who controls and directs a company's operations in reality (TR 2018/5 paragraph 19).

A person without any legal power or authority to control or direct a company may exercise central management and control of that company.

Where is the central management and control exercised?

Central management and control of a company may be exercised in more than one location. However, for the purpose of the central management and control test, a company's central management and control will only be considered to be exercised in a place if it is exercised in that place to a substantial degree, sufficient to conclude that the company is really carrying on business there (TR 2018/5, paragraph 31).

Paragraphs 35 to 37 of TR 2018/5 discuss relevant considerations for determining where central management and control of a company is exercised. The matters that are most likely to determine where those who control and direct the operations of a company do so from are:

• where those who exercise central management and control do so;
• where the governing body of the company meets;
• where the company declares and pays dividends;
• the nature of the business and whether it dictates where control and management decisions are made in practice; and
• minutes or other documents recording where high-level decisions are made.

Other matters, of lesser weight include:

• where those who control and direct the company's operations live;
• where the company's books are kept;
• where its registered office is located;
• where the company's register of shareholders is kept;
• where the shareholder's meetings are held; and
• where its shareholders reside.

In the present circumstances, the board of directors of Company A has conferred the authority to make decisions regarding the control and direction of the company's operations to its shareholders, being the trustees of the Trust. The board of directors carries out the decisions made by the shareholder/ trustees.

These decisions include making decisions about the sale of significant assets such a commercial property and business assets, the use of assets such as leasing of business assets, financial matters such as the issue and payment of a dividend, renumeration of a director and appointment of a director.

In light of Company A's operations, it is considered that these decisions which are made by Company A's shareholder/ trustees constitute acts of exercising central management and control.

Therefore, Company A's shareholder/trustees are exercising central management and control of this company, and not its directors.

These high-level decisions are made at the shareholder/trustees' meetings which are held in Country B, as evidenced by the minutes of trustees' meetings provided by the applicant. The taxpayer, an Australian resident is recorded as attending these meetings in Country B, apart from one meeting.

However, some decisions are made in informal meetings through telephonic or electronic means. Unanimous consent is required for a resolution to be passed at these meetings. Not all trustees are present in Country B when these meetings occur with the taxpayer present in Australia.

Notwithstanding this, the majority of the trustees are based in Country B. Further, the business activities of Company A are directed to providing management services to two Country B companies.

Additionally, Company A's books and share register are all located in Country B. It declares and pays dividends to the Trust, which is a registered Country B trust, from Country B.

Therefore, based on the facts presented it is considered that central management and control of Company A is exercised outside of Australia.

Accordingly, as Company A's central management and control is not in Australia, Company A is not a resident of Australia under the CM&C test within subsection 6(1).

In relation to the voting power test, one of the requirements to be met is that the voting power in the company is controlled by Australian residents. In this case, the trustees in their capacity as trustees of the trust hold the shares in Company A. Three of trustees are residents of Country B and one trustee is a resident of Australia. On the facts presented, no one trustee controls the voting power in Company A.

Accordingly, Company A is not an Australian resident under the voting power test. Therefore, Company A is not a resident of Australia for Australian income tax purposes.

As such, Company A is a resident of Country B for the purposes of the Country B Agreement.

Application of Article 10 - Dividends Article

Article 10 of the Country B Agreement deals with the taxation of dividends. Article 10(1) confirms Australia's right to tax the dividends paid by Company A where the dividends are beneficially owned by a resident of Australia. Article 10(2) however provides that Country B may impose a reduced rate of taxation where the dividends are beneficially owned by an Australian resident.

Under Article 23, Country B tax paid in accordance with the Agreement (whether direct or by deduction) on income derived by a resident of Australia from Country B sources is required to be allowed as a credit against the Australian tax payable in respect of that income.

Therefore, it is necessary to first determine whether the taxpayer 'beneficially owned' the dividends for the purposes of Article 10 of the Country B Agreement.

The term 'beneficially owned' is not defined in the Country B Agreement. Article 3 relevantly provides that any term not defined in the Agreement shall take its meaning under the domestic laws of the country applying the treaty, unless the context otherwise requires. Relevant context for the purposes of interpreting an Australian tax treaty includes the Commentaries on the OECD Model Tax Convention on Income and on Capital (the OECD Commentary).

Paragraph 104 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements states that the OECD Commentary provides important guidance on interpretation and application of the OECD Model Tax Convention and will often need to be considered as a matter of practice, in interpreting tax treaties, at least where the wording is ambiguous.

Paragraph 12.1 of the 2017 OECD Commentary on Article 10 of the Model Tax Convention states:

"... The term "beneficial owner" is therefore not used in a narrow technical sense (such as the meaning it has under the trust law of many common law countries), rather, it should be understood in its context, in particular in relation to the words "paid... to a resident", and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance."

In paragraph 12.4 of the 2017 OECD Commentary, it is considered that the 'beneficial owner' of a dividend is the entity which has the right to use and enjoy the dividend income unconstrained by a contractual or legal obligation to pass on the payment received to another person.

Further, it is noted in paragraph 12.4 that Article 10 refers to the beneficial owner of a dividend as opposed to the owner of the shares, which may be different in some cases.

In contrast, entities such as agents, nominees, and conduit companies that are acting as a fiduciary or administrator on account of the interested parties would not be the 'beneficial owner' of the income despite being the direct recipient of the income. In particular, paragraph 12.4 states:

"..In these various examples (agent, nominee, conduit company acting as a fiduciary or administrator), the direct recipient of the dividend is not the "beneficial owner" because that recipient's right to use and enjoy the dividend is constrained by a contractual obligation to pass on the payment received to another person..."

In the present circumstances, Company A paid a dividend to the Trust on a specified date in the 20xx income year and also in the 20yy income year. On these same dates, the Trustee of the Trust applied the dividend income to the benefit of the taxpayer, a beneficiary of the Trust. Therefore, it is considered that the taxpayer is the beneficial owner of the dividend income, and not the Trust, as legal owner of the shares and direct recipient of the dividend payment.

Accordingly, Article 10 of the Agreement applies to the dividends paid by Company A and beneficially owned by the taxpayer.

As mentioned above, Article 10(2) provides for a reduced rate of taxation for dividends paid by a Country B company to an Australian resident. Relevantly, Article 10(2) limits the rate of taxation to not exceed 15% per cent of the gross amount of dividends.

As such, Country B dividend tax should have been levied on the dividends paid by Company A at a rate not exceeding 15% of the gross amount of the dividends, and not at the higher rate of 20%.

Consequently, the foreign income tax that will count towards the taxpayer's tax offset will be limited to 15% of the gross dividend amounts paid by Company A, and not 20% of the gross dividend amounts. The taxpayer will need to seek a refund of the balance of the dividend tax i.e., 5% from the Country B Tax Authority.

In this regard, the ATO publication - 'Guide to foreign income tax offset rules' relevantly states the following:

"..The foreign income tax must be correctly imposed under the relevant foreign law and in accordance with any tax treaty the country has with Australia. For example, if country A is limited under a tax treaty to taxing interest derived in that country by an Australian resident at a rate of up to 10%, but country A imposes a domestic tax rate of 25% for interest derived by all foreign residents, only 10% of the tax counts towards the tax offset. The taxpayer would need to seek a refund of the balance (that is, 15%) from country A's tax authority.."

Requirement 2 - Foreign income tax paid

To count towards a tax offset, the foreign income tax must actually be 'paid' by the taxpayer or be deemed to be paid by the taxpayer. In the present circumstances, the taxpayer did not actually pay the Country B dividend tax, and therefore it will be necessary to consider the deeming provisions found in section 770-130.

Section 770-130 applies to treat a taxpayer as having paid foreign income tax in circumstances where the tax is actually paid by someone else. It, relevantly, provides the following:

"..770-130(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. .......

770-130(2)....

770-130(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..."

Central to the operation of section 770-130(3) is section 6B of the ITAA 1936. Relevantly, subsection 6B(1) of the ITAA 1936 provides that income derived by a person as beneficiary of a trust is deemed to be attributable to a dividend if the income can be attributed, directly or indirectly, to a dividend.

Further, subsection 6B(2A) of the ITAA 1936 operates to deem income to be derived from a particular source if it is attributable by virtue of subsection 6B(1) to be dividend income derived from that source.

The Explanatory Memorandum at paragraphs 1.108 and 1.109 provides the following explanation about the operation of section 770-130(3) and section 6B, stating:

"..1.108 ...Subsection 770-130(3) continues to ensure the flow-through of tax offset entitlement where a beneficiary receives a trust distribution that includes income received by the trust on which foreign income tax has already been paid - that is, the trust itself has not paid the foreign income tax... .

1.109 When applied in conjunction with section 6B of the ITAA 1936, it also guarantees that the character and source of income flows through a trust (or multiple trusts or a combination of trusts and partnerships) to a beneficiary. The language of section 6B '...attributable to...' in addition to '...derived from a particular source...', ensures that the character of the distribution as well as the source of the income remains unchanged.."

The reference to source in subsection 6B(2A) is to geographical source - see the reference to subsection 6B(2A) in paragraph 2.38 in the Treasury Laws Amendment (International Tax Agreements) Bill 2019 to Australia's specific deeming source rules).

For the deeming provision in subsection 770-130(1) to apply an amount must be included in a taxpayer's ordinary income under section 6-5 or statutory income under section 6-10. Further, the reference in subsection 770-130(1) to an amount of foreign tax "in respect of" an amount that is all or part of an amount included in the taxpayer's ordinary or statutory income means that there must be a nexus between the amount included in assessable income and the foreign income tax.

Section 10-5 lists those provisions about statutory income. Included in this list is section 97 of the ITAA 1936 which deals with present entitlement to the net income of a trust estate. Subsection 97(1) provides that in circumstances where a beneficiary that is a resident not under a legal disability has been made presently entitled to a share of the income of the trust estate, the beneficiary includes their share of the net income of the trust estate in assessable income.

In the present circumstances, the taxpayer received trust distributions from the Trust on specified dates in the 20xx and 20yy income years. These distributions are clearly attributed to the dividend amounts which were paid by Company A to the Trust, also on these same dates. Therefore, subsection 6B(1)(b) will apply to deem the trust distributions to be attributable to the dividends paid by Company A to the Trust. Subsection 6B(2A) will operate to render this income as having a Country B source.

Thus, subsection 6B(1) together with subsection 6B(2A) will operate to preserve the character of the income as dividend income and its Country B source. This is notwithstanding that the income passed through the Trust to the taxpayer. This trust distribution income (the taxed amount) is included in the taxpayer's assessable income under section 97(1) of the ITAA 1936 and, therefore, will form part of the taxpayer's statutory income under section 6-10.

Accordingly, paragraph 770-130(3)(a) is satisfied. Paragraphs 770-130(3)(b) and (c) are also satisfied because:

•         the amount of foreign income tax (i.e., Country B dividend tax) was paid in respect of both dividends - paragraph 770-130(3)(b); and

•         the trust distribution amounts are less than it would have been if that tax had not been paid - paragraph 770-130(3)(c).

Therefore, the taxpayer will be treated under subsection 770-130(1) as having paid an amount of foreign income tax in respect of the two trust distributions which are to be included in their statutory income. Consequently, the second requirement is met.

Requirement 3 - Amount included in taxpayer's assessable income

In respect of the final requirement, it must be determined whether the foreign tax was paid 'in respect of amount that is all or part of amount included in your assessable income for the income year' - refer to subsection 770-10(1).

A taxpayer's 'assessable income' as defined in section 6-1 comprises of amounts of ordinary income (section 6-5) and statutory income (6-10).

As discussed previously, both trust distribution amounts which are referable to the dividend distributions from Company A to the Trust are included in the statutory income of the taxpayer under subsection 97(1) of the ITAA 1936, and therefore will form part of their assessable income. Country B dividend tax was deemed to be paid in respect of these trust distribution amounts (subsection 770-130(1)).

Therefore, the taxpayer satisfies all the requirements of section 770-10(1). Consequently, the taxpayer will be entitled to a foreign income tax offset for the amounts of Country B dividend tax paid in relation to the trust distribution amounts from the Trust, which are included in the taxpayer's assessable income and are attributable to the dividend distributions by Company A to the Trust.

However, as noted earlier in the discussion on 'Requirement 1 - Foreign income tax' the amount of the foreign income tax that will count towards the taxpayer's tax offset will be limited to 15% of the gross dividend amounts, and not 20% of the gross dividend amounts.

Question 2 and Question 3 - 'Foreign income tax offset - Company income tax and Dividend tax'.

Question 2 is directed to determining whether the taxpayer is to include in their assessable income the amount of pre-tax income of Company A which was used to fund the dividends for the purposes of claiming a foreign income tax offset. Question 3 is directed to determining whether the taxpayer is entitled to a foreign income tax offset which is an aggregate of the Country B company income tax paid by Company A and its subsidiaries that is attributable to Company A's retained earnings and the Country B dividend tax deducted by Company A on dividends paid to the Trust.

This following discussion will focus on the taxpayer's entitlement to claim a foreign income tax offset for the Country B company income tax and the requirement to include the pre-tax income of Company A in the taxpayer's assessable income.

As mentioned earlier, one of the requirements for a foreign income tax offset in subsection 770-10(1) is that the income or gain on which the taxpayer paid foreign income tax must be in respect of an amount included in the taxpayer's assessable income for the income year. A taxpayer's assessable income consists of its ordinary income under section 6-5 and statutory income under section 6-10.

It is clear from information provided that the pre-tax income of Company A was income derived by Company A, and not by the taxpayer. Therefore, this income will not be regarded as ordinary income of the taxpayer under section 6-5. Further, there is no income tax provision that applies to treat this income as assessable income of the taxpayer.

Consequently, as the amounts of pre-tax income of Company A are neither ordinary income nor statutory income of the taxpayer, they are not included in the taxpayer's assessable income. As such, the terms of section 770-10(1) are not satisfied.

Furthermore, the taxpayer is also required to meet the requirement that the foreign income tax (i.e., Country B company income tax) must be paid or deemed to be paid by them in respect of amounts included in their assessable income.

In relation to this requirement, the ATO publication 'Guide to foreign income tax offset rules' provides the following explanation and pertinent examples:

"..To count towards a tax offset, the foreign income tax must have been paid on income, profits or gains that are included in your income for Australian income tax purposes.

For example, where a person receives a dividend from a foreign company, the foreign income tax on the underlying company profits (the source of the dividend) is not paid in respect of the shareholder's dividend income. Similarly, a person receiving a pension from a foreign superannuation fund has not paid the foreign income tax levied on the income of the superannuation fund. In both of these cases, the tax that has been paid relates to the income or gains of the other entity, which is being taxed in its own right..."

In the present circumstances, the amounts of Country B company income tax that were paid by Company A, and also its subsidiaries, were paid in respect of their own Country B income tax liabilities on their Country B taxable income.

As such, the required nexus between the payment of the Country B company income tax by Company A and its subsidiaries, and the amounts included in the taxpayer's assessable income being trust distributions from the Trust, is not present.

In this regard, it was earlier concluded that the amounts which are to be included in the taxpayer's assessable under section 6-1 are the trust distribution amounts that originated from the dividend distributions from Company A, and not the pre-tax income of Company A.

Further, section 770-130 would not apply to deem the Country B company income tax as being paid because the Country B company income tax paid by Company A and its subsidiaries is not tax which has been paid "in respect of" the taxpayer's assessable income (i.e., trust distributions). The Country B company income tax was paid in respect of the taxable income of Company A and its subsidiaries.

Accordingly, as the taxpayer is not entitled to a foreign income tax offset for the Country B company income tax under section 770-10, it follows that it cannot claim a foreign income tax offset amount which is an aggregate of the Country B company income tax and the Country B dividend tax.

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