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Ruling

Subject: Entitlement to foreign income tax offset by a dual resident

Question

Are you entitled to a foreign income tax offset (FITO) in respect to the federal tax that will be paid on your country X source interest income derived in the year ended 30 June 2011?

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 are a visa holder in country X.

You are not a citizen of country X.

You derived interest income in country X during the year ended 30 June 2011.

The country X source interest income will be included in your Australian assessable income.

You have and will continue to elect for country X purposes to be taxed as a resident of country X.

You have maintained a home in both Australia and country X, but your personal and economic relationships were closer in Australia and therefore you are deemed to be an Australian resident under the tiebreaker rules in the country X Convention.

In respect to the year ended 30 June 2011, you will have paid country X tax rate on the country X source interest income. The amount of that country X tax paid will exceed $1,000.

Relevant legislative provisions

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

Section 4 of the International Tax Agreements Act 1953

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our 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 tax has been paid on that income, a foreign income tax offset will be allowed.

In determining Australia's obligation to provide credit relief under its domestic law for foreign taxes paid on foreign income, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one.

Australian Treaty Series sets out the tax treaty between Australia and the country X (country X Convention). The country X Convention operates to avoid the double taxation of income received by Australian and the country X residents.

In your case, you are considered as an Australian resident under the country X Convention and have elected to be taxed as a resident of the country X.

A paragraph of Article 1 of the country X Convention provides that, notwithstanding any provision of this Convention, with some exceptions that are not relevant to this case, a Contracting State may tax its residents and individuals electing under its domestic law to be taxed as residents of that State, and by reason of citizenship may tax its citizens, as if the country X Convention had not entered into force. Accordingly, the interest income sourced in the country X has been taxed by country X solely on the basis of your election under the country X Convention. Australia, as your country of residence, also has a taxing right under the country X Convention.

Article 22(2) of the country X Convention provides that country X tax paid under the law of the country X and in accordance with this Convention in respect of income derived from sources in the country X by a person who, under Australian law relating to Australian tax, is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. However, the Article specifically excludes, for the purposes of such credit, country X tax imposed in accordance with paragraph of Article 1 by reason of an election by an individual under country X domestic law to be taxed as a resident of the country X.

Accordingly, Australia is not obliged to provide credit relief pursuant to Article 22 of the country X Convention for the tax paid in country X on your interest income.