Edited version of private advice

Authorisation Number: 1052188935819

Date of advice: 21 December 2023

Ruling

Subject: Foreign income and foreign income tax offsets

Question 1

Do you include the gross amount of the foreign income you received in your 20XX income tax return?

Answer

Yes.

Question 2

Are you entitled to claim a foreign tax offset (FITO) under Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997) for the foreign tax you paid in Country A on your salary from your overseas employer?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

You are an Australian citizen.

During a two year period you worked in Country A for a Country A domiciled Company (your Employer).

You had a work permit from the time your employment with your Employer.

Your Employer registered an official ID Number for tax purposes.

During the period that you lived and worked in Country A, your Employer paid you in their currency and withheld tax based on you being a resident of Country A.

In late 20XX, early 20XX, during the COVID-19 pandemic, your Employer directed all expatriate staff to return to their country of residence where possible, and work remotely.

You returned to Australia and continued to work remotely for your Employer.

From the time you returned to Australia, you did not have a permanent home available to you in Country A.

During this time you continued to be paid a salary in their currency with tax being withheld and remitted to the tax authority in Country A.

In July 20XX, it became clear that you were unlikely to return to Country A to work for your Employer. You were told your position would be terminated.

On XXOctober 20XX you were made redundant.

You lodged your 20XX income tax return and included $X of assessable foreign sourced income.

During the relevant period you were an Australian resident for Australian income tax purposes.

During the relevant period you are not sure if you were also a resident of Country A for income tax purposes.

During the relevant period you had a permanent home available to you in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 770-10(1)

Income Tax Assessment Act 1997 Section 770-15

International Tax Agreements Act 1953

Reasons for decision

Question One

Section 6-5 of Income Tax Assessment Act 1997 (ITAA 1997) states your assessable income includes ordinary income derived directly or indirectly from all sources during the income year.

Subsection 6-5(2) provides that if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

It is possible to be a resident for tax purposes of more than one country at the same time in respect of an income year or part of an income year. Where this is the case, in determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Sections 4 and 5 of the International Tax Agreements Act 1953 (Agreements Act) incorporate that Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law.

Australia has entered into a double tax agreement with Country A, the Agreement between the Government of the Australia and the Government of Country A for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (The Agreement).

The Agreement operates to avoid the double taxation of income received by residents of Australia and Country A.

Article XX of The Agreement sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income under the double tax agreement. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

The tie-breaker tests in Article XX of the Agreement are as follows:

3. Where by reason of the preceding provisions of this Article a person, being an individual, is a resident of both Contracting States, then the status of the person shall be determined in accordance with the following rules:

(a) the person shall be deemed to be a resident solely of the Contracting State in which a permanent home is available to the person;

(b) if a permanent home is available to the person in both Contracting States, or in neither of them, the person shall be deemed to be a resident solely of the Contracting State in which the person has an habitual abode;

(c) if the person has an habitual abode in both Contracting States or in neither of them, the person shall be deemed to be a resident solely of the Contracting State with which the person's economic and personal relations are closer.

Article XX of the Agreement states that salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in that other State.

Application to your circumstances

In your case you were an Australian resident for tax purposes for the period from XX July 20XX to XX October 20XX. You are not certain as to whether or not you were a resident of Country A during this period, however, you did not have a permanent home available to you in Country A from the time you returned to Australia. You did have a permanent home available to you in Australia from XX July 20XX to XX October 20XX.

We have concluded that the tiebreaker tests of the Agreement apply so that you are deemed to be a resident only of Australia for treaty purposes. The provisions of the Agreement will therefore apply on the basis that you are a resident of Australia and not of Country A

Therefore, the salary you received from your Employer is taxable solely in Australia and Australia's taxing right is not limited by the Agreement. You will need to include the gross amount of foreign income you received from your Employer from XX July 20XX until XX October 20XX in your income tax return for the relevant year.

Question Two

Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to a Foreign Income Tax Offset (FITO) for foreign tax paid in respect of an amount that is included in the person's assessable income in a year of income.

The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset.

To determine the amount of FITO in any particular year, a person must first calculate the total foreign income tax paid on amounts included in their assessable income for the year.

Section 770-15 of the ITAA 1997 defines foreign income tax to include a tax on income that is imposed by a law other than an Australian law. A note to section 770-15 of the ITAA 1997 states that foreign income tax includes only that which has been correctly imposed under the foreign law.

Article XX of the Agreement sets out the methods of elimination for double taxation. Article XX states:

Subject to the provisions of the law of Australia from time to time in force which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (which shall not affect the general principle of this Article), Country A tax paid under the law of Country A and in accordance with this Agreement, whether directly or by deduction, in respect of income derived by a person who is a resident of Australia from sources in Country A shall be allowed as a credit against Australian tax payable in respect of that income.

Application to your circumstances

In your case you are an Australian resident for tax purposes who has paid tax in Country A on your salary paid to you by your Employer.

The Agreement assigns the sole taxing right on the income to Australia.

The tax you paid to Country A on the salary you received from your Country A Employer was not correctly imposed for the purposes of section 770-15 of the ITAA 1997 and was not paid in accordance with the Agreement. Therefore, you are not entitled to a FITO.