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Edited version of your private ruling
Authorisation Number: 1012524284871
Ruling
Subject: Foreign income tax offset
Questions and answers:
1. Is the foreign country Government's compulsory deduction a 'substantially similar' tax to the existing taxes in that country under the double tax agreement?
No.
2. Are you entitled to a foreign income tax offset for the amount of the compulsory deduction?
No.
This ruling applies for the following periods:
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commence on:
1 July 2012
Relevant facts and circumstances
You are an Australian citizen who is an Australian resident for taxation purposes.
You have moved to a foreign country for 12 months and you are employed there on a salary.
From your foreign gross salary each fortnight a number of items are deducted including in addition to income tax.
Certain contributions go to a Fund which helps pay for welfare benefits and pensions in that foreign country. Most employees pay their contributions through the foreign country's PAYE system.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 770
International Tax Agreements Act 1953 Paragraph Sch20-Art 25(1)
International Tax Agreements Act 1953 Sch20-Art2
Reasons for decision
The foreign income tax offset (FITO) rules are designed to protect you from the double taxation that may arise where you pay foreign tax on income that is also taxable in Australia. This is achieved by allowing you to claim a tax offset where you have paid foreign tax on amounts included in your assessable income.
The FITO rules are contained in Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997).
Tax treaty
As you have pointed out Australia has a tax treaty with the foreign country in which you are working that operates to avoid double taxation. An Article of the Agreement provides that existing taxes to which the Agreement shall apply in Australia are the Australian income tax, including the additional tax upon the undistributed amount of the distributable income of a private company. In the foreign country, it applies to the income tax, the corporation tax, and the capital gains tax. The Agreement also applies to any identical or substantially similar taxes which are imposed after the date of signature of the Agreement.
A further Article of the Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in the foreign country in accordance with the Agreement will be allowed against Australian tax payable on income from that foreign country's sources.
Compulsory contribution
The deductions referred to are compulsory for employees.
Where a person makes a compulsory contribution to a levy which will be used to provide benefits for that person in the future, that contribution is more akin to a payment for services than a payment of tax. For instance, if a taxpayer makes a contribution to an unemployment fund and is entitled to unemployment benefits as a result of making those contributions, the contributions have the character of compulsory insurance instead of a tax.
It is possible that some taxpayers may never qualify for benefits under the scheme as they may never become unemployed, incapacitated, attain old age or they may never have a large family. However, if (after satisfying all the relevant conditions) a contributor is entitled to a benefit in return for the contributions, those contributions would be more appropriately regarded as compulsory insurance premiums. They are payments which are made in return for being insured against the happening of a future event. They are not regarded as the payment of tax.
Therefore, the contributions are not considered to be a foreign tax paid when working out entitlement to a foreign income tax offset.
Income periods
You have stated that your ruling ought not be time limited to any accounting period. Taxation Ruling TR 2006/11 Private Rulings explains that the Commissioner limits the life of a private ruling because of the possibility that laws may change or a subsequently issued public ruling may override a private ruling the Commissioner issues to you. In these circumstances a ruling that had been issued to you would no longer apply and could no longer be relied upon.