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Ruling

Subject: foreign income tax offset

Question:

Are you entitled to a foreign income tax offset for foreign tax paid in relation to the capital gain on the sale of your property in a foreign country to the extent you are entitled to the benefit of an exemption from capital gains tax by investing the capital gain in the foreign government bonds?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for taxation purposes.

You purchased a property in the foreign country in the year ended 30 June 2004, which was registered in your name.

You sold the property in the year ended 30 June 2011.

You made a capital gain on the sale of the property.

In the foreign country, under income tax law, a long term capital gain is exempted if the entire capital gain is invested in the foreign government bonds for a certain period.

You bought government bonds in the foreign country for the value of the capital gains in order to be exempted from paying capital gain tax in the foreign country on the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 770-10

Reasons for decision

Under section 770-10 of the Income Tax Assessment 1997, to be entitled to a foreign income tax offset (formerly known as a foreign tax credit):

§ the foreign tax must be foreign income tax

§ you must have actually paid, or be deemed to have paid, the foreign income tax

§ the income or gain on which you paid foreign income tax must be included in your assessable income in Australia.

The offset is available in the income year in which the income or gain (on which the foreign income tax has been paid) forms part of your assessable in Australia. Only foreign income tax paid on the whole or part of a capital gain that is included in the taxpayer's net capital gain is eligible for a tax offset.

A foreign income tax offset may be available for the taxes imposed by the foreign country, namely, income tax, including any surcharge, capital gains tax and non-resident withholding tax.

A taxpayer is not entitled to a tax offset for foreign income tax offset to the extent they, or any other entity, are entitled to:

§ a refund of the foreign tax, or

§ any other benefit worked out by reference to the amount of foreign income tax (other than a reduction in the amount of the foreign income tax).

In your case, you made a capital gain on the sale of your property in the foreign country. You have invested your entire capital gains in the government bonds in the foreign country for a certain period to get exempted from paying capital gains tax in the foreign country.

Therefore, you are not entitled to a foreign income tax offset as foreign income tax (capital gains tax) is not treated as paid by you.