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Ruling

Subject: Foreign income tax offset

Question 1

Is the taxpayer entitled to a foreign income tax offset under section 770-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to income derived from services provided in Country X and taxed in Country X?

Answer: Yes.

This ruling applies for the following periods:

Year ending 30 June 2013.

Relevant facts and circumstances

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer derives income for services provided in Country X.

The taxpayer pays company tax in Country X on the income derived in Country X.

The taxpayer will not create a permanent establishment in Country X to provide the services required under the relevant contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Division 770

Reasons for decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived from all sources whether in or out of Australia during the income year.

Therefore, income derived from services provided in Country X is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 770-10(1) of the ITAA 1997 states that you are entitled to a tax offset for an income year for foreign income tax, if you paid it in respect of an amount that is included in your assessable income for the year.

Subsection 770-15(1) of the ITAA 1997 defines 'foreign income tax' as follows:

    Foreign income tax means tax that:

(a) is imposed by a law other than an Australian law; and

(b) is:

(i) tax on income; or

(ii) tax on profits or gains, whether of an income or capital nature; or

(iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

Note: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953), has been correctly imposed in accordance with that tax treaty.

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

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

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 and the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the domestic law where there are inconsistent provisions (except for some limited provisions).

Clauses 67 and 69 of Part 1 of the International Tax Agreements Amendment Act (No. 1) 2011 (45 of 2011) repealed the Schedules to the Agreements Act, except for the treaty with Taipei, from 27 June 2011. This repeal has no effect on the law and the agreements are now defined in section 3 and given force of law in section 5 of the Agreements Act.

There is currently no Double Tax Agreement between Australia and Country X, therefore the Agreements Act is not applicable in these circumstances.

Accordingly, the taxpayer will be entitled to a foreign income tax offset for Country X taxes paid on services income derived in Country X which is included in their assessable income in Australia.