Edited version of private advice

Authorisation Number: 1052405196810

Date of advice: 5 June 2025

Ruling

Subject: Foreign income tax offset

Question

Are you entitled to a foreign income tax offset (FITO) for the withholding tax paid on income received from the sale of your investment property in Country X?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

On DD MM 20YY, you purchased a property in Country X as joint tenants.

On DD MM 20YY, you sold the property.

You made a capital gain of $XXXX AUD.

As the property was held for more than 12 months, you applied the capital gains tax (CGT) 50% discount and divided the capital gain equally.

You lodged income tax returns in Country X. No CGT was reported in your returns.

A Country X withholding tax form was completed and withholding tax was deducted from the income received from the sale of the property.

You each paid $XXXX AUD of Country X withholding tax.

As the property was held for more than 12 months, you each apportioned the amount of Country X withholding tax by 50% as you were eligible for the capital gain discount. Therefore, you each included $XXXX in the FITO amounts in your 20YY Australian income tax return.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 section 770-15

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 section 5

Does Part IVA apply to this private ruling?

No.

Reasons for decision

Section 770-10 of the Income Tax Assessment Act (ITAA 1997) is the primary provision under which a 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.

To qualify for a foreign income tax offset (FITO) you must meet all of the following criteria:

•                     you must have paid the foreign tax on the foreign income,

•                     the foreign tax must be a tax which you were personally liable for, and

•                     the income or gain that the foreign tax was paid must be included in your assessable income for Australian income tax purposes.

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).

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.

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).

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 5 has the force of law. The Country X Agreement is listed in section 5 of the Agreements Act.

The Country X Agreement operates to avoid the double taxation of income received by residents of Australia and Country X.

Article X of the Country X Agreement identifies the taxes which apply. The tax covered are the income taxes imposed.

Article X of the Agreement shall apply to any identical or substantially similar taxes which are imposed by either Australia or Country X after the date of signature of this Agreement, 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)

Therefore, based on the OECD Commentary the taxes covered by the Country X Agreement 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.

Paragraph 5 of Taxation Ruling IT 2437 Income Tax: foreign tax credit system- foreign taxes eligible for credit against Australian income tax (IT 2437) explains:

Essentially, foreign tax must be imposed on a basis substantially equivalent to that on which the Income Tax Assessment Act operates. That is, it must be imposed on the basis of a taxpayer's net income or gains, whether of an income or capital nature, or be a withholding tax on outgoing payments (imposed as a final tax and not be later creditable against the ultimate foreign tax liability of the taxpayer) similar to the Australian withholding tax on the gross amount of outgoing dividends and interest payments. This has been the basis which has been used in the past to measure whether a foreign tax qualifies as a tax that would render an Australian resident recipient of the income upon which it is imposed eligible for the exemption from Australian tax provided by paragraph 23(q) of the Assessment Act.

Application to your circumstances

The federal income tax on your foreign income is taken to be an 'income tax'under section 770-15 of the ITAA 1997.

In your case, you paid a withholding tax in Country X on the sale of an investment property.

This means that the Country X withholding tax, paid as a foreign person on the sale of your rental investment property in Country X can be claimed as a FITO in relation to your foreign capital gain.

As you owned the property for more than 12 months, you are required to apportion your share of the Country X withholding tax in line with the 50% capital gain discount.

This is in line with our view expressed in the ATO Interpretive Decision ATO ID 2010/175 Income Tax Foreign income tax offset entitlement where foreign capital gain is only partly assessable in Australia.

Accordingly, you each may include an amount of $XXXX as part of your FITO claimed in your 20YY Australian income tax return.

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