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Ruling

Subject: Foreign income tax offset

Question

If you pay an amount of Country X income tax that was correctly imposed under County X tax law on your salary and wages, will you be entitled to a foreign income tax offset?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on

1 July 2010

Relevant facts and circumstances

You are a resident of Australia for tax purposes.

Your employer has provided details of your earnings to the ATO and the Country X tax authority.

The Country X tax authority will be taxing you on all or part of your salary and wages.

There is currently no double tax agreement between Australian and Country X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

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

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

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are considered to be ordinary income for the purposes of this subsection.

In your case you are a resident taxpayer and you receive salary and wages income from your employment. You have included this income in your Australian tax return for the 2010-11 financial year.

If a taxpayer has paid foreign income tax on amounts included in their assessable income, they may be entitled to a non-refundable foreign income tax offset, which provides relief from double taxation.

Foreign tax must be foreign income tax

The foreign income tax must be correctly imposed under the relevant foreign law and in accordance with any tax treaty the country has with Australia. (Subsection 770-15(1) of the ITAA 1997).

The foreign income tax may be imposed at a national, state, provincial, local, municipal or supra-national level; an example of a supra-national tax is that imposed by the European Union on pensions paid to its former employees.

Foreign income tax offset

Subsection 770-10(1) of the ITAA 1997 provides that a taxpayer is entitled to a foreign income tax offset for an amount of foreign income tax if they paid it in respect of an amount that is all or part of an amount included in their assessable income for the year.

The general rule is that, to qualify for an offset for an income year, you must have paid foreign income tax on an amount that is included in your assessable income for that year. If only part of the amount on which foreign tax has been paid is assessable, only the same proportion of the foreign tax counts towards the offset.

The foreign tax must be paid, and it is not sufficient that the foreign tax has simply accrued, or that the liability for has arisen.

It is not necessary that the payment of foreign income tax actually occurs in the claim year. Payments in a different year may occur, for example because of differences in tax accounting rules in the other country. To cover this eventuality, the normal amendment period is extended to four years and this period starts at the time of payment.

This means that when you lodge your Australian tax return, if you have not paid foreign tax on your salary and wages you cannot claim a foreign income tax offset at that time. However, if you do pay foreign tax on that income at a later date, you can amend your Australian tax return to claim the foreign income tax offset.

The rate of translation to Australian dollars of the foreign tax paid would be the rate of exchange applicable at the time of payment of the relevant foreign assessment.

Where the foreign tax year is on a different basis to that of the Australian fiscal year ended 30 June, you may need to apportion the foreign tax paid between more than one Australian tax year.

The Commissioner would accept a reasonable apportionment of the amount. Examples of calculation methods that may be used are:-

· 365ths or daily

· quarterly basis

· or a percentage basis