Edited version of private advice

Authorisation Number: 1051672648577

Date of advice: 12 May 2020

Ruling

Subject: Foreign income tax offset

Question 1

Are you entitled to a foreign income tax offset (FITO) for the Country Y Federal Income Tax shown as an amount withheld on your Country Y 20XX salary and wages summary?

Answer

Yes

Question 2

Are you entitled to a foreign income tax offset (FITO) for the Country Y State Tax shown as an amount withheld on your Country Y 20XX salary and wages summary?

Answer

Yes

Question 3

Are you entitled to a foreign income tax offset (FITO) for the Country Y local Tax shown as an amount withheld on your Country Y 20XX salary and wages summary?

Answer

Yes

Question 4

Are you entitled to a foreign income tax offset (FITO) for the Country Y Social Security Tax shown as an amount withheld on your Country Y 20XX salary and wages summary?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You have been working in a city of Country Y in the 20XX calendar year (which is also Country Y's taxation year) and this employment has continued in the 20XX calendar year.

You hold a current visa that allows you to work in Country Y.

You provided a 20XX wages and salaries a summary attachment which includes the following types of tax withheld from your Country Y salary:

·         Federal tax withheld.

·         Social security tax withheld.

·         State tax withheld.

·         Local tax withheld.

The Country Y salary amounts are assessable income in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6AB

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Section 770-15

International Tax Agreements Act 1953

Reasons for decision

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 the law under the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the International Tax Agreements Act 1953 (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 Convention between the Government of Australia and the Government of Country Y for the avoidance of Double Taxation and the prevention of fiscal evasion with respect to taxes on income (The Country Y convention) is listed in section 5 of the Agreements Act.

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

Article 15 of the Country Y 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 Country Y for a period exceeding in the aggregate 183 days in the taxable year of Country Y.

Article 2(1)(a) of the Country Y convention identifies the taxes to which the Convention shall apply. The only Country Y tax covered by the Convention is Federal income taxes.

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 in Article 2 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)

The social security tax deducted from your salary in Country Y is not an income tax or a corporation tax and is not substantially equivalent to income tax imposed under Australian law.

In addition the social security tax charges shown on your Country Y salary summary are not taxes covered by the Country Y convention.

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

However, as the federal income tax, state wages tax and local tax were all taxes imposed on your foreign income - and are all taken to be an 'income tax' under section 770-15 of the ITAA 1997 - you are therefore entitled to a FITO for these taxes paid in Country Y.