Edited version of private advice

Authorisation Number: 1051798269529

Date of advice: 21 January 2021

Ruling

Subject: Foreign income tax offset

Question

Are you entitled to a Foreign Income Tax Offset (FITO) for salary deductions made to fund contributions to the Country A compulsory healthcare fund, also known as X?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2020

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You receive a salary from Country A and a series of compulsory deductions are deducted before you receive a net salary. One such deduction is the X% deduction for healthcare X.

X is administered by the government to provide public healthcare to the Country A population.

X was established in 19XX and in 19YY the contribution was set at X% of salary. This health fund covers most of the Country A population and covers citizens under several schedules.

The contribution deducted from your monthly salary is remitted directly to X without any co-contribution from your employer. This deduction is listed as a "Contribution" on your salary advice.

It is compulsory to contribute to either X or an approved private health care provider. Most of the population is covered by X.

There is no limitation as to age, employment, ex, nationality, or any other distinction which limits membership or benefits from X.

Country A has a Double Taxation Agreement with Australia, the Country A Convention.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 770-15

Income Tax Assessment Act 1997 Section 770-70

Convention Between Australia and Country A for the Avoidance of Double Taxation with Respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion, and Protocol (The Country A Convention)

OECD Commentaries on the Model Tax Convention on Income and on Capital: Condensed Version (2010) (The OECD Model Commentary)

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 may be entitled to a foreign income tax offset (FITO) in Australia.

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 Income Tax Assessment Act 1997 (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.

The foreign country Double Tax Agreements (DTA's) are contained under the International Tax Agreements Act 1953.

In considering whether an amount withheld from a taxpayer's salary is a 'foreign income tax', it is necessary to consider the basis on which the amount is withheld and any future benefit the taxpayer might derive in respect of the withheld amount. Substantial, although not exact, equivalence to Australian income tax is required.

Any tax covered by a relevant country's DTA is necessarily a 'foreign income tax'. It should be noted that X is not mentioned in the Country A Convention.

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.).'

In your case Country A has a Double Tax Agreement with Australia. The X contributions paid have a connection between the tax or levy and the intended benefits to the individual, in this case you become eligible for health care benefits.

It is immaterial whether you access such benefits, mere qualification for X benefits requires that the deductions shall be excluded from the list of taxes.

You are therefore not entitled to a FITO for the X contributions deducted from your salary.