Edited version of private ruling

Authorisation Number: 1011738923822

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Ruling

Subject: Country B foreign income tax offset.

Question 1

Are you entitled to a foreign income tax offset under subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of foreign employment income received in Country B?

Answer

Yes.

Question 2

If the substantiation provided does not satisfy the requirements under subsection 770-130(2) of the ITAA 1997 to show that foreign tax has been paid on your behalf then whether or not you are required to include this amount as additional assessable income?

Answer

Withdrawn (as per discussion in the 2011 income year)

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You were employed by a company as an employee.

You were based and worked in the company's operations - offshore mainland Country B.

You have provided a letter from the company stating that the company has paid the total amount of all federal personal income taxes on your behalf to the Country B Tax Authority.

You were registered with the Country B Tax Authority.

You have provided the payment summary from the company which does not refer to any foreign tax paid on your behalf.

The payment summary does not state that the amount of the Country B income tax paid is included in gross income.

Your income is subject to tax in Country B under their domestic law.

There is no tax treaty between Australia and Country B.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 770-15(1)

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

Income Tax Assessment Act 1997 Subsection 770-130(2)

Reasons for decision

Subsection 770-10(1) of the ITAA 1997 provides that a taxpayer is entitled to a foreign income tax offset for foreign income tax the taxpayer paid on an amount included in assessable income.

The taxpayer must have paid the foreign income tax before an offset is available. An offset will not be available for credit absorption taxes or unitary taxes.

Paragraph 1.83 of the Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 4) Act 2007, which introduced the foreign income tax offset rules, states:

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 (Subsection 770-15(1) of the ITAA 1997)

Hence, the federal personnel income tax paid on your behalf by your employer to the Country B Tax Authority (as stated in your employer's letter) is foreign income tax for the purposes of section 770-10 of the ITAA 1997.

Subsections 770-130(1) and 770-130(2) of the ITAA 1997 provide that a taxpayer is still treated as having paid foreign income tax where the foreign income tax is paid by someone else under an arrangement or under the law relating to the foreign income tax.

The taxpayer is deemed, in some circumstances, to have paid the foreign income tax when in fact it has been paid by someone else - for example, a foreign company - or if the foreign income tax has been withheld from the income at its source.

For these subsections to apply there must be a nexus between the payment of the foreign income tax and the tax liability of the taxpayer.

In your case, you have not paid foreign income tax directly, however your employer has paid foreign income tax on your behalf. The payment of foreign income tax paid relates to your tax liability.

It is considered that the letter provided by your employer satisfies the requirements under subsection 770-130(2) of the ITAA 1997 to show that foreign tax has been paid on your behalf though the amount of the Country B income tax paid is not shown on the payment summary.

Accordingly, subsection 770-130(1) of the ITAA 1997 will deem you to have paid the foreign income tax.

As you are taken to have paid foreign income tax in respect of an amount included in your assessable income, you are entitled to a foreign income tax offset under subsection 770-10(1) of the ITAA 1997.

The amount of the offset will be the amount of foreign income tax paid, subject to your foreign income tax offset limit worked out under section 770-75 of the ITAA 1997.

Paragraphs 1.94 and 1.95 of the Explanatory Memorandum state:

The requirement to gross-up a double-taxed amount by the foreign income tax paid in respect of that income is fundamental to any foreign tax offset system. The amount of income that is subject to tax in a taxpayer's country of residence is the gross amount of the income, before any payment of foreign income tax.

There will be some circumstances in which a taxpayer will not have to do anything to achieve that outcome, namely, where foreign income tax is paid on a net assessment basis. In this situation, the taxpayer determines the double-taxed amount before the payment of foreign income tax and it is this amount that is included in assessable income. There is no requirement to expressly gross-up the double-taxed amount in these cases because foreign income tax has not been deducted from the amount included in assessable income. However, where the foreign income tax is withheld from the amount paid or credited to the taxpayer, that tax amount must be added to the net amount received by the taxpayer before including it in assessable income.

As the foreign income tax is withheld from the amount paid to you, you are required to include in your assessable income the tax paid by your employer. That is, you are required to gross-up your foreign employment income received by the amount of the tax paid by your employer.

Note: You should contact your employer to confirm whether or not the amount of the Country B tax paid is included in your gross earnings. The payment summary and letter do not show that the amount of the Country B income tax paid is included in your gross earnings.