Edited version of private ruling

Authorisation Number: 1011899671970

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Ruling

Subject: Foreign income tax offset

Question 1

Are you entitled to a foreign income tax offset?

Answer

Yes.

Question 2

Can you use the actual amount assessed and paid in relation to the income for the overseas tax year in calculating your foreign income tax offset?

Answer

No.

Question 3

Is your foreign income tax offset based on the amount of foreign tax paid on the income that is included in your Australian assessable income for the July 2010 to June 2011 period?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You and your family moved to Australia in the 2010 financial year.

You are an Australian resident for tax purposes.

You are not a foreign resident.

You run a business overseas. The income from this business is subject to tax overseas.

You have been assessed and paid tax to the relevant authority. You paid more than $1,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 6.

Income Tax Assessment Act 1997 Division 770.

International Tax Agreements Act 1953 Schedule 42.

Reasons for decision

Australian tax liability

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Business income is assessable income for the purposes of Division 6 of the ITAA 1997.

In determining liability to Australian tax on foreign source income it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

The Agreements Act contains the tax treaty between Australia and country A (the Agreement). The Agreement operates to avoid the double taxation of income received by Australian and country A residents.

The Agreement provides that the agreement shall apply to any identical or substantially similar taxes which are imposed under the federal law of Australia or by the government of country A under its domestic law.

The Agreement provides that business profits shall be taxed in the country of source and it may also be taxed in the country of residence of the recipient. Therefore, your business income may be taxed in accordance with the relevant countries domestic law.

As you are a resident of Australia, the Agreement provides that subject to the law of Australia, a credit against Australian tax will be allowed for tax paid in country A.

Foreign income tax offset

From 1 July 2008 the foreign tax credit system was replaced by the foreign income tax offset system.

A foreign income tax offset is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.

Under section 770-10 of the ITAA 1997, to qualify for an offset, you must have paid foreign income tax on an amount that is included in your Australian assessable income for that year.

As your overseas business profits are assessable to you in Australia, the overseas tax you paid on this income is used in calculating your allowable foreign income tax offset in Australia.  

The offset is based on the total foreign income tax paid, however, it is limited to the amount of Australian income tax that would have been payable on the relevant income (sections 770-70 and 770-75 of the ITAA 1997).

That is, when claiming a foreign income tax offset of more than $1,000 you need to calculate your foreign income tax offset limit. For information on this, please refer to the Guide to foreign income tax offset rules 2010-11 on the Australian Taxation Office website www.ato.gov.au. You can only claim an offset up to the amount of that cap. Any excess offset cannot be carried forward to a later income year.

Differences between the Australian and country A tax systems and years lead to you paying foreign income tax in a different income year to that in which you include the related income in your Australian assessable income.

In your situation, only part of your country A income on which foreign tax has been paid is included in your assessable income on your 2010-11 Australian tax return. Only that proportion of the foreign income tax paid which relates to the proportion of foreign income included as assessable income is available as a tax offset.

Therefore to determine the amount of the tax offset in a year, you must first calculate the total foreign income tax paid on amounts included in your Australian assessable income for that year. Foreign income tax is not considered to have been paid to the extent that it is refundable.

Where you pay foreign income tax after the year in which the related income has been included in your assessable income, you may amend your assessment for that year to claim the offset.

Therefore in your situation, the income from your business derived in the period July 2010 to June 2011 is included as assessable income on your 2011 Australian tax return. However as you have only paid the associated tax for a few months, only that portion of tax can be included when calculating your allowable foreign income tax offset.

When you later pay the tax for the remaining overseas income, you may then request an amendment to your 2011 assessment to include the additional foreign income tax offset allowable.

In relation to the tax already paid for the 2009-10 financial year, you may need to request an amendment to your 2010 assessment if you are entitled to an additional foreign income tax offset amount.