Edited version of private advice

Authorisation Number: 1052199744517

Date of advice: 12 December 2023

Ruling

Subject: Foreign income tax offset

Question

Are you entitled to claim a foreign input tax offset (FITO) under Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997), for tax paid by a company in another country, following the receipt of dividends from this overseas company?

Answer

No.

This ruling applies for the following period:

Year ending 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 tax purposes.

In the 20XX income year you received dividends from an overseas company for the amount of $X, which converted to AUD $X.

In the 20XX income year you received dividends from an overseas company for the amount of $X, which converted to AUD $X.

You included these amounts in your Australian income tax returns for the relevant years.

You did not claim a foreign income tax offset (FITO).

You do not pay any personal income tax in the overseas country.

Country A is a single tier tax country. The overseas company was taxed for the relevant years at a tax rate of X%.

Country A residents do not declare dividends in their tax returns or pay any tax on the dividends received.

No tax was withheld from the dividends you received from the overseas company. They are single tier dividends and are not taxable in the hands of the shareholder.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 770-10

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

Income Tax Assessment Act 1997 Section 770-15

Income Tax Assessment Act 1997 Subsection 770-130(1)

Income Tax Assessment Act 1997 Subsection 770-130(2)

Reasons for decision

Foreign Income Tax Offset

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. It is not necessary that the payment of foreign income tax actually occurs in the claim year.

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 be entitled to a FITO, you must have actually paid, or be deemed to have paid an amount of foreign income tax.

Subsections 770-130(1) and 770-130(2) provide that a taxpayer is treated as having paid foreign income tax on all or part of their income where the tax has been paid in respect of that income by someone else on their behalf under an arrangement with the taxpayer or under the law relating to that tax.

This tax-paid deeming rule ensures that the right taxpayer obtains the tax offset. It applies in situations where the foreign income tax has actually been paid by someone else in a representative capacity for the taxpayer, with the latter bearing the economic burden of the tax. Specifically, it applies where foreign income tax has been paid by:

• deduction or withholding
• a trust in which the taxpayer is a beneficiary
• a partnership in which the taxpayer is a partner, or
• the taxpayer's spouse.

To count towards a tax offset, the foreign income tax must have been paid on income, profits or gains that are included in your income for Australian income tax purposes. There must be a nexus between the payment of the foreign income tax and the tax liability of the taxpayer.

For example, where a person receives a dividend from a foreign company, the foreign income tax on the underlying company profits (the source of the dividend) is not paid in respect of the shareholder's dividend income. The tax that has been paid relates to the income or gains of the other entity, which is being taxed in its own right.

Application to your circumstances

In your case you are an Australian resident for tax purposes who has received dividends from an overseas company. You have included this income in your Australian tax returns for the 20XX and 20XX income years.

You did not pay any personal tax in the overseas company, in respect to the any dividends received, and no tax was withheld from these dividends. The overseas company has paid tax at a rate of X%.

As you have not paid any foreign income tax, and the tax paid by the overseas company does not relate to your tax liability, you are not entitled to a FITO in respect of the dividends you received from the overseas company.