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Edited version of private advice
Authorisation Number: 1051589910484
Date of advice: 3 October 2019
Ruling
Subject: Foreign social security and education contributions
Question
Can the amounts withheld from wages paid in Country Z for social security and education contributions be claimed as an eligible tax credit or deduction?
Answer
No.
This ruling applies for the following periods:
1 July 2017
The scheme commences on:
30 June 2020
Relevant facts and circumstances
You obtained a visa in mid 20XX and started working in Country Z.
You pay tax at Country Z rates.
Your monthly pay has withholding amounts' for income tax, social security and education.
The amount withheld over several months period being $Y.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 6AB
Income Tax Assessment Act 1997 section 8-1
Income Tax assessment Act 1997 section770-10
Income Tax assessment Act 1997 section770-15
Reasons for decision
Foreign Income Tax Offset
A taxpayer whose assessable income in Australia is also subject to foreign income tax and who has, or is deemed to have, paid the foreign income tax in the income year is entitled to a foreign income tax offset (FITO) in Australia under section 770-10 of the Income Tax assessment Act 1997 (ITAA 1997).
Section 6AB of the Income Tax Assessment Act 1936 (ITAA 1936) defines both the foreign income and the foreign taxes in respect of which a foreign tax credit may be claimed under section 160AF of the ITAA 1936. The definition of foreign tax includes income tax imposed by a law of a foreign country.
Taxation Ruling IT 2507 Income tax: foreign tax credit system foreign taxes eligible for credit against Australian income tax is relevant.
Paragraph 5 of Taxation Ruling IT 2507 states that a foreign tax credit may be claimed in respect of income tax and corporation tax including any withholding tax, prepayment or advance payment with respect to the aforesaid taxes imposed.
The concept of 'foreign income tax' is intended to cover foreign taxes imposed on a basis that is substantially equivalent to income tax imposed under Australian law.
'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 law under the International Tax Agreements Act 1953.
In Taxation Ruling TR 2001/13 entitled Income tax: Interpreting Australia's Double Tax Agreements, the Commissioner accepts that it is appropriate to have reference to the OECD Model Commentary.
The OECD Commentary on Article 2 provides that:
· 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, districts...municipalities or groups of municipalities, etc).
· 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.
The social security and education contributions deducted from your salary in Country Z are not income taxes or corporation taxes and are not substantially equivalent to income tax imposed under Australian law.
Therefore you are not entitled to claim a foreign tax credit in your Australian tax return for these deductions.
Deductible expense
For an expense you have incurred to be deductible you must satisfy the conditions of section 8-1 of the ITAA 1997. This provision of the Act 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.
As the social security and education deductions are not incurred in gaining or producing your assessable income it is not a deductible expense.