Edited version of private advice

Authorisation Number: 1052241977906

Date of advice: 16 April 2024

Ruling

Subject: CGT - deceased estate

Question 1

Can a foreign income tax offset be claimed in the deceased's 'date of death' tax return for the payment of a foreign tax?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased died on XX XX 20XX. Extract of Death Certificate was provided indicating the deceased passed away in Country C.

The deceased was Country B national and a resident of Australia for tax purposes.

The deceased migrated to Australia in 20XX.

The deceased died intestate.

An application for letters of administration was made by Person A on XX XX 20XX.

A copy was provided of the Grant of Letters of Administration made to Person A on XX XX 20XX by the Supreme Court of State A.

Person A is not an Australian resident for tax purposes.

Control and management of the deceased estate is outside of Australia.

A copy of the list of assets held by the deceased at date of death included the following properties:

Australian properties:

•         The deceased acquired their main residence located at XX XX, XX (Property 1) on XX XX 20XX.The property was sold on XX XX 20XX for $XX with a settlement date of XX XX 20XX.

o   Foreign resident capital gains withholding was withheld from the sale of Property 1 of $XX

o   The capital gain from the disposal of Property 1 was included in the net income of the estate in the deceased's estate trust return for the income year ended XX June 20XX.

•         An investment property located at XX XX, XX (Property 2). The property was acquired by the deceased on XX XX 20XX. A copy of the sale contract dated XX XX 20XX was provided showing sale price $XX and settlement date of XX XX 20XX.

o   Foreign resident capital gains withholding was withheld from the sale of Property 2 of $XX.

o   The capital loss from the disposal of Property 2 was included in the net income of the estate in the deceased's estate trust return for the income year ended XX June 20XX.

Foreign properties:

•         The deceased acquired an investment property located at XX XX, XX (Property 3) on XX XX 20XX as a joint tenant with Person A.

o   The deceased's ownership interest in Property 3 was transferred to the joint tenant.

o   The property was leased, but the deceased received nil rental income and made no contribution to the property loan, its management or maintenance. Under Country B's law the deceased's ownership interest transfers to the joint tenant on the date of the deceased's death. The title transfer will be completed once application for Country B probate registration is finalised.

•         The deceased acquired an ownership interest in a property located at XX, XX XX (Property 4) on XX XX 20XX as tenants in common with Person B and Person C.

o   The deceased's ownership interest in Property 4 was transferred to the tenants in common in equal shares.

o   The property was leased, but the deceased received nil income and made no contribution to the property loan, its management or maintenance. Under Country B laws of intestacy, the deceased's ownership interest will transfer to Person B and Person C in equal shares once application for Country B probate registration is finalised.

The trust tax return was lodged for the deceased's estate on XX XX 20XX for the income year ended XX XX 20XX.

The deceased held bank accounts in both Australia and Country B.

The deceased owned a motor vehicle.

The deceased held XX Life insurance with Person A as beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 subsection 770-10(1)

Income Tax Assessment Act 1997 section770-15

Reasons for decision

Division 770 of the ITAA 1997 outlines when an entity may be entitled to a non-refundable tax offset for foreign income tax paid on their assessable income.

The object of this Division is to relieve the potential for double taxation where an entity has paid foreign income tax on amounts included in their assessable income and, apart from the operation of Division 770 of the ITAA 1997, would pay Australian income tax on the same amount.

Subsection 770-10(1) of the ITAA 1997 provides that: 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.

'Foreign income tax' is defined in section 770-15 of the ITAA 1997:

(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

Certain foreign taxes are not included. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2007 Measures No.4) Act 2007 outlines the new foreign income tax offset rules. The EM covers what foreign taxes are eligible for a tax offset. An extract from the EM states:

What foreign taxes are eligible for a tax offset?

1.83 A tax offset will be available for those foreign income taxes that are substantially equivalent to Australian income tax. That is, the foreign income tax must be levied on the taxpayer's income, profits or gains of an income or capital nature, or be similar to Australian withholding tax that is imposed in place of a tax on the net amount of income. [Schedule 1, item 1, subparagraphs 770-15(1)(b)(i) and (ii)].

1.84 Inheritance taxes, annual wealth taxes or net worth taxes are not taxes on income, profits or gains and therefore will not be eligible for a tax offset. Further, foreign tax based on receipts, turnover or production, are not considered foreign income tax.

1.85 Foreign taxes specified within any of Australia's tax treaties, for which Australia is obliged to provide relief, will be considered to be foreign income taxes for the purpose of allowing a tax offset [Schedule 1, item 1, subparagraph 770-15(1)(b)(iii)]. For example, the Philippines tax treaty has rules pertaining to tax sparing. These tax sparing amounts will be treated as a foreign income tax under the International Tax Agreements Act 1953.

We cannot comment on Country B's laws. However, in this situation the foreign tax paid does not count towards the FITO. Therefore, no FITO can be claimed in the deceased's 'date of death' tax return for the foreign tax paid.

We also concluded the foreign tax cannot be included as part of the cost base or reduced cost base of a CGT asset. This is because the foreign tax does not fall within any of the elements of the cost base or reduced cost base under section 110-25 and section 110-55 of the ITAA 1997.

A beneficiary of a deceased estate can include in the cost base and reduced cost base of an asset previously owned by the deceased person any expenditure their legal personal representative would have been able to include at the time the asset passes to the beneficiary. The beneficiary is taken to have incurred the expenditure on the day the representative incurred it (subsection 128-15(5) of the ITAA 1997).

The five elements of the cost base are set out in section 110-25 of the ITAA 1997. The inclusion of incidental costs of acquisition in the second element of the cost base indicates that incidentals would not ordinarily be included in the first element of the cost base. Accordingly, it is considered that the payment of the foreign tax is not in respect of acquiring, holding or disposing either of the properties situated in Country B, nor does it relate a CGT event that happened in relation to the assets.

The foreign tax is not considered to be a duty tax. The tax is not imposed on either the transfer of the property, nor on an asset-by-asset basis. Therefore, the amount cannot be related to any particular asset, nor apportioned accordingly.

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