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Edited version of your private ruling
Authorisation Number: 1012470809200
Ruling
Subject: Foreign income tax offset
Question 1
Is the Company entitled to claim the foreign income tax offset under section 770-10 of the Income Tax Assessment Act 1997 for foreign tax withheld from commissions earned?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 2013
Relevant facts and circumstances
The Company is an Australian resident company. The Company entered into a reinsurance contract with Foreign Co (a foreign resident country) on behalf of two reinsurers. A Reinsurance Premium was paid to the Company, as agent of the two reinsurers. Foreign tax was paid on the Premium Amount. A Commission was paid to the Company by the two reinsurers.
Relevant legislative provisions
Income tax assessment act 1997 - Section 770-10
Reasons for decision
Subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA1997) provides that:
You are entitled to a *tax offset for an income year for *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.
For the Company to be eligible for the Foreign income Tax Offset under section 770-10 of the ITAA 1997 for the foreign tax paid, the foreign tax must be paid in respect to an amount included in the Company's assessable income.
The tax is paid in respect of the Reinsurance Premium. The Explanatory Memorandum to Tax Laws Amendment (2007 Measures No. 4) Act 2007 (the EM) provides assistance in interpreting 'in respect of an amount'.
The EM provides at paragraph 1.98:
1.98 …where one taxpayer has paid foreign income tax on behalf of another taxpayer, relief from double tax will continue to be denied for the first taxpayer because the foreign income tax paid by them is not in respect of an amount included in their assessable income. Rather, the taxpayer that includes the double-taxed amount in assessable income may be entitled to relief.
As the Company is not beneficially entitled to the Reinsurance Premium it receives from Foreign Co, it does not include the premium in its assessable income. The Company only includes the Commission amount in its assessable income. The Commission amount is of a different character to the Reinsurance Premium.
Accordingly, the Company is not entitled to the foreign income tax offset in respect of amounts foreign tax paid on the Reinsurance Premium it receives on behalf of the two reinsurers.
The foreign tax is not paid in respect of an amount included in the Company's assessable income. The Company is therefore not eligible for a foreign income tax offset under subsection 770-10(1) of the ITAA 1997 for tax paid in the overseas country on the Premium Amount.