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Edited version of your private ruling
Authorisation Number: 1012599331305
Ruling
Subject: Assessability of foreign income and eligibility for foreign income tax offset
Question 1
Is your income derived outside Australia assessable in Australia and required to be declared in your Australian tax return?
Answer
Yes.
Question 2
Are you entitled to claim a foreign income tax offset (FITO) for the National Insurance scheme payments in country Y?
Answer
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 commences on
1 July 2012
Relevant facts and circumstances
You are a resident of Australia for taxation purposes.
You are currently working in Country Y and earning salary and wages.
You are required to pay a Health Service Insurance levy in Country Y and this comes out of your pay.
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source.
As you are a resident of Australia for taxation purposes you are assessable on your income derived both in and out of Australia.
You are required to declare your income derived outside Australia in your Australian tax return.
Foreign income tax offset
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 ITAA 1997.
National Insurance is a scheme where people in work in country Y make payments towards benefits. The payments are called National Insurance contributions and certain benefits are only payable if you meet the National Insurance contribution conditions. National Insurance contributions also go towards the costs of the National Health Service. The National Insurance scheme is administered by HM Revenue and Customs (HMRC) in country Y.
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 contributor 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, National Insurance payments are not considered to be a foreign tax paid when working out entitlement to a foreign income tax offset.