Edited version of private advice

Authorisation Number: 1051926577727

Date of advice: 26 November 2021

Ruling

Subject: Foreign income tax offset and rental deduction

Question 1

Are you entitled to a Foreign income tax offset for the social charges imposed on your Country Y rental income?

Answer

Yes.

Question 2

Are you entitled to a deduction against your Country Y rental income for the property tax?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You own rental properties in Country Y.

You pay taxes in Country Y on the rental property.

The social charge is calculated by tax rate multiply by the net rental profit.

The property tax is calculated based on the value of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 770

International Tax Agreements Act 1953

Reasons for decision

Question 1

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 operates to avoid the double taxation of income received by residents of Australia and Country Y. Article X of the Country Y agreement lists the existing taxes to which the agreement shall apply. Country Y taxes that are specifically identified within the Country Y agreement include income tax and social contributions.

The social charges are not specifically identified within the Country Y agreement as taxes to which the agreement applies. However, Article X of the agreement states that this Convention shall also apply to any identical or substantially similar taxes which are subsequently imposed by a Contracting State in addition to, or in place of the existing taxes to which this Convention applies.

The social charge is considered to be 'substantially similar' to the Country Y income tax and social contributions identified within Article X of the Country Y agreement. Therefore, you can take these social charges into account when determining your entitlement to a Foreign income tax offset.

Question 2

The property tax is a tax based on the value of property and does not qualify for a Foreign income tax offset.

However, you are able to claim a deduction against your rental income for the property tax as it is an expense necessarily incurred in deriving your assessable income.