Edited version of your written advice

Authorisation Number: 1013026762877

Date of advice: 1 June 2016

Ruling

Subject: Deduction and Foreign Income Tax Offset

Questions and Answers

1. Are you entitled to an income tax deduction for the following amounts shown on your payslips of the Foreign Country A

• personal superannuation and pension contributions?

No

2. Are you entitled to an income tax deduction for the following amounts shown on your payslips of the Foreign Country A

• unemployment, accident, sickness income insurance and professional security?

Yes

3. Are you entitled to an income tax deduction for the following amounts shown on your payslips of the Foreign Country A

• payments for family and next generation benefits?

No

4. Are you entitled to a foreign income tax offset (FITO) for the social security charges shown on your payslips of the Foreign Country A?

No

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You moved to Foreign Country A for work.

You worked in a construction company; a Foreign Country A based company as an employee.

You provided copies of payslips relating to the 2015 financial year. The payslips are detailed various amounts withheld for the Foreign Country A's social security contributions and other purposes.

You provided the following information in relation to the various withholding amounts from your salary:

• personal superannuation and pension contributions

• unemployment, accident, sickness income insurance and professional security

• payments for family and next generation benefits

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 290-150

Income Tax Assessment Act 1997 Section 290-155

Income Tax Assessment Act 1997 Section 770-15

Income Tax Assessment Act 1997 Section 770-70

Superannuation Industry (Supervision) Act 1993 Section 45

International Tax Agreements Act 1953

Reasons for decision

Deductibility of personal superannuation and pension contributions

Section 290-150 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can deduct a contribution you make to a superannuation fund, or an RSA, for the purpose of providing superannuation benefits for yourself where certain conditions are met.

To qualify for a tax deduction the following conditions must be satisfied:

• the contribution must be made to a complying superannuation fund or an RSA for the purposes of providing superannuation benefits for the contributor (whether or not the benefits are payable to the contributor's dependants) (subsection 290-150, 290-155);

• if the taxpayer is an employee engages in employment activities, the total of the taxpayer's assessable income and reportable fringe benefits attributable to the employment activities, must be less than 10% of the taxpayer's total assessable income.

Therefore, to be entitled to a deduction for personal superannuation contributions under section 290-150 of the ITAA 1997 the contribution must first of all be made to a complying superannuation fund. A complying superannuation fund has the meaning given by section 45 of the Superannuation Industry (Supervision) Act 1993 (SISA).

A complying superannuation fund is one which the regulator (either the Commissioner of Taxation or the Australian Prudential Regulation Authority) has given notice to the trustee of the fund that they are a complying superannuation fund for a financial year.

As neither the Commissioner nor the Australian Prudential Regulation Authority are regulators for superannuation funds outside of Australia, the fund into which your Foreign Country A pension is deposited cannot be a complying superannuation fund.

Therefore, you are not entitled to claim an income tax deduction for the Foreign Country A pension contributions.

Deductibility of unemployment, accident, sickness income insurance and professional security

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. 

In applying this section, the courts have held that to be deductible the loss or outgoing must be incidental and relevant to the earning of assessable income. The leading case is
the Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; 81 ATC 4114; (1981) 11 ATR 538 (Smith's Case).

In Smith's Case the High Court considered the deductibility of premiums paid for a personal disability insurance policy. The policy provided the taxpayer with a monthly indemnity against any income loss arising from an inability to earn.

The Court held that the premium was deductible because it was incidental and relevant to the operations and activities carried on to produce assessable income. This decision was not made by reference to the certainty or likelihood of the premium generating income but by reference to its nature and character and its general connection with the taxpayer's activities which directly produced assessable income.

In your case, payments deducted from your gross salary that are in the nature of premium paid for unemployment, accident or sickness income protection insurance and professional security for yourself.

Therefore, you are entitled to claim an income tax deduction under section 8-1 of the ITAA 1997 as there is sufficient connection to earning your assessable income and are not of a capital, private or domestic nature.

Deductibility of payments for family and next generation benefits

Based on the information provided by you, these two items are social security charges paid where there is connection between the tax or levy and the intended benefits to the individual.

You are not entitled to claim an income tax deduction under section 8-1 of the ITAA 1997 as both items were not incurred in gaining or producing your assessable income and they are of a private or domestic nature.

Foreign income tax offset (FITO)

Foreign income tax is defined in section 770-15 of the ITAA 1997 as a tax imposed by a law other than an Australian law that is:

• tax on income; or

• tax on profits or gains, whether of an income or capital nature; or

• any other tax, being a tax that is subject to an agreement having the force of the law under the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that the Acts are read as one.

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Foreign Country A convention is listed in section 5 of the Agreements Act.

The Foreign Country A convention is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Foreign Country A convention operates to avoid the double taxation of income received by residents of Australia and the Foreign Country A.

Article 15(1) of the Foreign Country A convention provides that salary, wages and other similar remuneration derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in Foreign Country A in which case it can be taxed in both countries.

Article 2(3) of the Foreign Country A convention identifies the taxes to which the Convention shall apply. The Foreign Country A's tax covered by the Convention is the Federal, cantonal and communal taxes on income (total income, earned income, income from capital, industrial and commercial profits and other items of income).

In interpreting the wording of the double tax agreements, the Commissioner accepts in Taxation Ruling TR 2001/13 Income Tax: Interpreting Australia's Double Tax Agreements that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (Condensed Version 2010) (the OECD Model Commentary).

The OECD Model Commentary provides that:

• social security charges or any other charges paid where there is a direct connection between the levy and the individual benefits to be received shall be excluded from the list of taxes covered by the Convention, and

• it is immaterial on behalf of which authorities such taxes are imposed; it maybe the State itself or its political subdivisions or local authorities (constitute states, regions, provinces, department, cantons, district etc)

Accordingly, in your case, the social security charges shown on your Foreign Country A's payslips are not taxes covered by the Foreign Country A convention.

Therefore, you are not entitled to a FITO for the social security charges you have paid in Foreign Country A.