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Edited version of your written advice
Authorisation Number: 1013058388452
Date of advice: 25 July 2016
Ruling
Subject: Foreign income tax offset
Question and answer
Are you entitled to a Foreign Income Tax Offset (FITO) for social security tax and Medicare Tax paid overseas?
No.
This ruling applies for the following periods:
Year ended 30 June 2016
The scheme commenced on:
1 July 2015
Relevant facts and circumstances
You are a resident of Australia for taxation purposes.
You have paid Social Security tax and Medicare Tax overseas.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 770-10
International Tax Agreements Act 1953 Section 5
Reasons for decision
Foreign income tax is a tax imposed by a law other than an Australian law, on income profits or gains (subsection 770-15(1) of the ITAA 1997).
In determining the availability of a foreign income tax offset it is necessary to consider not only the income tax laws but also any applicable tax treaties contained in the International Tax Agreements Act 1953 (Agreements Act).
Section 4 of the International Tax Agreements Act 1953 incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).
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 Country Y Agreement is listed in section 5 of the Agreements Act.
The Country Y agreement operates to avoid the double taxation of income received by residents of Australia and Country Y.
Article XX (X) of the Country Y Convention provides that where Country Y tax has been imposed in respect of Country Y sourced income in accordance with paragraph (3) Article 1 of the Country Y Convention (other than Country Y tax imposed solely by reason of citizenship or by reason of an election by an individual under Country Y domestic law to be taxed as a resident of the Country Y , in respect of income derived from sources in the Country Y) by a resident of Australia shall be allowed, a credit against Australian tax payable on that income. The credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as it may be in force.
Article 2(1) of the Country Y Convention identifies the taxes to which the Convention shall apply. The Country Y tax covered by the Convention is the Federal income taxes imposed by the Internal Revenue code.
Article 2(2) of the Country Y Convention states that: the Convention shall also apply to any identical or substantially similar taxes which are imposed by either Australia or Country Y after the date of signature of this Convention, in addition to existing taxes in place. At the end of each calendar year, the competent authority of each country shall notify the competent authority of the other of any substantial changes made during the year.
In interpreting the wording of the tax treaty, the Commissioner accepts in Taxation Ruling TR 2001/13 that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (Condensed Version 2005) (the OECD Model Commentary).
The OECD Commentary on this paragraph 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 may be the State itself or its political subdivisions or local authorities (constitutes States, regions, provinces, department, cantons, district etc).
Based on the OECD Commentary, the taxes covered by the Country Y Convention that an Australian resident shall be allowed as a FITO would be the Federal income tax and the State income tax. These taxes are imposed on income at the Federal and the State level.
The social security tax and the Medicare tax are not taxes covered by the Country Y Convention, as they are social security charges or any other charges paid where there is connection between the tax or levy and the intended benefits to the individual.
Therefore you are not entitled to a FITO for the social security tax and the Medicare tax paid in the Country Y as explained above.