Edited version of private advice

Authorisation Number: 1052338585085

Date of advice: 13 December 2024

Ruling

Subject: Foreign income tax offset

Question 1

Can the taxpayer claim a foreign income tax offset for Country Y Federal income tax paid in his Australian income tax return?

Answer

Yes.

Question 2

Can the taxpayer claim a foreign income tax offset for Country Y Federal tax A paid in his Australian income tax return?

Answer

No.

Question 3

Can the taxpayer claim a foreign income tax offset for Country Y Federal tax B paid in his Australian income tax return?

Answer

No.

Question 4

Can the taxpayer claim a foreign income tax offset for Country Y Federal tax C paid in his Australian income tax return?

Answer

No.

Question 5

Can the taxpayer claim a foreign income tax offset for Country Y State tax E paid in his Australian income tax return?

Answer

No.

Question 6

Can the taxpayer claim a foreign income tax offset for Country Y State tax F paid in his Australian income tax return?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

You have been a permanent resident of Australia since DD MM 20YY.

You live in Australia but are solely employed by a company in Country Y and are paid in Country Y dollars.

Your Country Y employer deducts various taxes out of your salary each month.

The payslip provided listed the Federal Income Tax, Federal tax A, Federal tax B, Federal tax C, State tax E, and State tax F.

You are a tax resident of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 770-10

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

Section 770-10 of the Income Tax Assessment Act (ITAA 1997) is the primary provision under which a foreign income tax offset (FITO) arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

The concept of 'foreign income tax' is intended to cover foreign taxes imposed on a basis that is substantially equivalent to income tax imposed under Australian law. The FITO is a non-refundable tax offset and is included as a gross up value of the income that is assessed.

Foreign income tax is a tax imposed by a law other than an Australian law, on income profits or gains (subsection 770-15(1) of the ITAA 1997).

In determining the availability of a foreign income tax offset it is necessary to consider not only the income tax laws but also any applicable tax treaties contained in the International Tax Agreements Act 1953 (Agreements Act).

In your case, the applicable tax treaty is the Convention J and K between Australia and Country Y.

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section X has the force of law. The Country Y Agreement is listed in section 5 of the Agreements Act.

The County Y Convention operates to avoid the double taxation of income received by residents of Australia and Country Y.

Article 2(1) of the Country Y Convention identifies the taxes which apply. The tax covered are Federal income taxes imposed.

Article 2(2) of the Convention shall apply to any identical or substantially similar taxes which are imposed by either Australia or Country Y after the date of signature of this Convention, in addition to existing taxes in place.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements provides, to interpret the wording of the tax treaty it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (Condensed Version 2017) (the OECD Commentary).

The OECD Commentary of Article 2 states:

•                     it is immaterial on behalf of which authorities such taxes are imposed; it may be the State itself or its political subdivisions or local authorities (constitutes States, regions, provinces, department, cantons, district etc)

•                     social security charges or any other charges paid where there is a direct connection between the levy and the individual benefits to be received, shall not be regarded as 'taxes on the total amount of wages'.

Therefore, based on the OECD Commentary the taxes covered by the Country Y Convention that an Australian resident shall be allowed as a FITO would be the Federal income tax and the State income tax. These taxes are imposed on income at the Federal and the State level.

Country Y Federal Income Tax

The federal income tax on your foreign income is taken to be an 'income tax'under section 770-15 of the ITAA 1997. You are entitled to a FITO for these taxes paid in the Country Y.

Country Y Federal taxes A, B and C

The Federal taxes A, B and C are not taxes covered by Country Y Convention, as they are amounts, or any other charges paid where there is connection between the tax or levy and the intended benefits to the individual.

Therefore, you are not entitled to a FITO for the Federal taxes A, B and C paid in the Country Y.

State tax E and F

You are not entitled to a FITO for these taxes or levies as there is a connection between these amounts and the intended benefits for the individual.

Other relevant information

We have limited our private ruling to the questions raised in your application. There may be related issues that you should consider, including:

FITO limit

The amount of FITO is limited to the lesser of foreign income tax paid or the amount of the FITO limit. Where the total foreign tax paid exceeds the amount of the FITO limit, no offset or deduction is allowed for the excess foreign tax, nor can the excess foreign tax be carried forward to later years.

For more information refer to the Guide to foreign income tax offset rules 2024 on our website ato.gov.au and search QC 101688.

This page will provide links and additional information to:

•                     eligibility and rules for the FITO

•                     when a FITO applies

•                     calculate your FITO or offset limit

•                     record keeping for FITO.

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