Edited version of private ruling

Authorisation Number: 1011732502303

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Ruling

Subject: Foreign income tax offset

Question

Can your excess foreign income tax offset be used to offset your Medicare levy?

Answer

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You earned assessable foreign income.

You paid foreign tax on your foreign income.

You stated that your foreign income tax offset is enough to offset all Australian tax payable and has excess to cover the Medicare levy assessed.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 770-75

Income Tax Assessment Act 1997 Subsection 63-10(1)

Income Tax Assessment Act 1997 Section 4-10

Taxation Administration Act 1953 Section 90-1

Reasons for decision

Subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where the assessable income of a resident contains foreign income and foreign income tax has been paid on that income, a foreign income tax offset (FITO) will be allowed. The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. The amount of the foreign income tax offset is subject to the FITO limit calculated in accordance with section 770-75 of the ITAA 1997.

The Tax Laws Amendment (2010 Measures No 1) Act 2010 introduced new Part 2-30 of Schedule 1 to the Taxation Administration Act 1953 and is applicable from 1 July 2008. The new legislation includes Medicare levy and Medicare levy surcharge in calculating the foreign income tax offset (FITO).

Although Medicare levy is included in the calculation of the FITO, when the FITO is applied to reduce the income tax payable, it only reduces the basic income tax payable (excluding Medicare levy). The amendment does not affect how the FITO is to be applied.

The table in subsection 63-10(1) of the ITAA 1997 sets out the order in which tax offsets are to be applied against "basic income tax liability". Item 22 in the table refers to FITO and states that any excess FITO cannot be refunded, transferred or carried forward to a later income year.

Section 4-10 of the ITAA 1997 specifically deals with how to work out the basic income tax payable on taxable income. That is, basic income tax liability is the result of applying the income tax rate to the taxable income. You then calculate the tax offsets and subtract the tax offsets from your basic income tax liability to reduce the amount of income tax payable.

The basic income tax liability in section 4-10 of the ITAA 1997 does not include Medicare levy. Accordingly, as a non-refundable tax offset, the foreign income tax offset reduces your basic income tax payable (excluding Medicare levy). Once your tax payable has been reduced to nil, any unused FITO is not refunded to you, nor can it be carried forward to later income years or be used to reduce the Medicare levy.