Edited version of your written advice

Authorisation Number: 1012878499871

Date of advice: 15 September 2015

Ruling

Subject: Foreign Income Tax Offset

Question

Is the amount of Company A's assessable income, that is foreign sourced and of which no foreign withholding tax had been paid, excluded under the assumption in subparagraph 770-75(4)(a)(ii) of the Income Tax Assessment Act 1997 for the purposes of calculating the foreign income tax offset limit?

Answer

Yes

Relevant facts and circumstances

Company A Pty Ltd is an Australian private company, specialising in international logistics and is an Australian resident for income tax purposes.

Part of Company A's revenue, is from services provided to overseas customers, who are not based in nor have any connection with Australia. Services provided include logistics services commencing from receipt of equipment from manufacturers or ports, located either inside or outside of Australia, for transport and delivery of such equipment to the customers' overseas locations, outside of Australia.

During the relevant financial year, income withholding tax was withheld on payments to Company A from some overseas customers as required by laws or regulations in relevant foreign jurisdictions.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 6-5,

Income Tax Assessment Act 1997 - Section 770-5,

Income Tax Assessment Act 1997 - Section 770-10,

Income Tax Assessment Act 1997 - Section 770-70, and

Income Tax Assessment Act 1997 - Section 770-75.

Reasons for decision

Summary reasoning

Assessable foreign source income, over which no foreign income tax has been paid, is excluded under the assumption in subparagraph 770-75(4)(a)(ii) of the Income Tax Assessment Act 1997 ('ITAA 1997') for the purposes of calculating the foreign income tax offset limit.

Detailed reasoning

As an Australian resident for income tax purposes, Company A is required under section 6-5 of the ITAA 1997 to include in its assessable income ordinary income amounts that it derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Where foreign income tax has been paid on an assessable income amount, to relieve double taxation, a non-refundable tax offset is allowed under Division 770 of the ITAA 1997. This purpose of the Division is provided in section 770-5 of the ITAA 1997.

Section 770-10 of the ITAA 1997 provides the circumstances in which you are entitled to claim a foreign income tax offset ('FITO').

Under section 770-70, the amount of tax offset available as per Division 770 is the sum of foreign income tax paid during the income year.

In Company A's circumstances, foreign income withholding tax has been withheld by its overseas customers. These gross amounts form part of Company A's assessable income under section 6-5 of the ITAA 1997.

Consequently, the foreign income tax withheld amounts may form part of Company A's FITO entitlement.

However section 770-75 imposes a limit on the FITO available to be claimed. The offset limit is calculated in subsection 770-75(2). Under this subsection, the limit is the greater of:

'(a) $1,000; and

(b) this amount:

(i) the amount of income tax payable by you for the income year; less

(ii) the amount of income tax payable by you for the income year if the assumptions in subsection (4) were made.'

Paragraph 770-75(4)(a) provides that the following assumptions must be made:

'(a) your assessable income did not include:

(i) so much of any amount included in your assessable income as represents an amount in respect of which you paid foreign income tax that counts towards the tax offset for the year; and

(ii) any other amounts of ordinary income or statutory income from a source other than an Australian source;…'

Applying the FITO limit in section 770-75, if Company A wishes to claim FITO of more than $1,000, then it is required to perform the calculation in paragraph 770-75(2)(b).

If subparagraph 770-75(4)(a)(ii) were to be read in isolation, then it appears all assessable foreign sourced income, irrespective of whether foreign tax is paid in relation to it, is excluded under that subparagraph. However, the words 'any other amounts' at the beginning of that subparagraph implies that any foreign source income must first be considered in respect of the first assumption in subparagraph 770-75(4)(a)(i).

As some of Company A's assessable foreign sourced income, has had foreign income withholding tax imposed over it, it is assumed to be excluded for the calculation of FITO limit, in accordance with subparagraph 770-75(4)(a)(i).

Furthermore, Company A also derived assessable foreign sourced income, of which no foreign income withholding tax has been imposed. Since these income amounts are foreign sourced, they are not from an Australian source. Therefore, they will also be excluded in the calculation of the FITO limit by the operation of the assumption in subparagraph 770-75(4)(a)(ii).