Edited version of private advice

Authorisation Number: 1052236780953

Date of advice: 27 March 2024

Ruling

Subject: Foreign income tax offset

Question

Are you entitled to claim a foreign income tax offset (FITO) under section 770-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for Australian sourced income?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

X and the spouse, Y, are both citizens of country Z.

X and Y are both Australian residents for tax purposes.

X works for an Australian company and Y teaches in Australia.

During 20XX financial year, X and Y sold some shares in country Z and made a capital loss.

On XX August 20XX, X and Y have reported their Australian employment income 20XX in country Z tax return.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 section 770-15

Reasons for decision

Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to a 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 or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreement Act 1953), has been correctly imposed in accordance with that tax treaty.

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

Article 1(3) of Country Z Agreement determined the ability of a Contracting State to tax its residents as follows:

(3) Notwithstanding any provision of this Convention, except paragraph (4) of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)) and individual electing under its domestic law to be taxed as residents of that State, and by reason of citizenship may tax its citizens, as if this Convention had not entered into force. For this purpose, the term "citizen" shall, with respect to Country Z source income according to Country Z law relating to purposes the avoidance of tax, but only for a period of 10 years following such loss.

The Article 22 of Country Z Agreement allows a tax credit for Country Z tax imposed in certain circumstance as follow:

(1) Subject to paragraph (4) and in accordance with the provisions and subject to the limitations of the law of Country Z (as it may be amended from time to time without changing the general principle hereof), in the case of Country Z, double taxation shall be avoided as follows:

(a) Country Z shall allow to a resident or citizen of Country Z as a credit against Country Z tax the appropriate amount of income tax paid to Australia; and

(2) Subject to paragraph (4), Country Z tax paid under the law of the Country Z and in accordance with this Convention, other than Country Z tax imposed in accordance with paragraph (3) of Article 1 (Personal scope) solely by reason of citizenship or by reason of an election by an individual under Country Z domestic law to by taxed as a resident of Country Z, in respect of income derived from sources in Country Z by a person who, under Australian law relating to Australian tax, is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income.

(3) An Australian corporation that owns at least 10 per cent of the voting power in a Country Z corporation is, in accordance with the law of Australia as in force at the date of signature of this Convention, entitled to a rebate in its assessment, at the average rate of tax payable by it, in respect of dividends paid by Country Z corporation that are included in the taxable income of the Australian corporation. However, should the law as so in force be amended so that the rebate in relation to the dividends ceases to be allowable under that law, Australia shall allow credit under paragraph (2) for Country Z tax paid on the profits out of which the dividends are paid as well as for Country Z tax paid on the dividends.

(4) For the purposes of computing Country Z tax, where a Country Z citizen is a resident of Australia, Country Z shall allow as a credit against Country Z tax the income tax paid to Australia after the credit referred to in paragraph (2). The credit so allowed against Country Z tax shall not reduce that portion of Country Z tax that is creditable against Australian tax in accordance with paragraph (2).

Application to your circumstances

In your case, you have paid your employment income tax in Country Z. Therefore, Country Z tax may have been imposed by reason of your Country Z citizenship under Article 1(3) of Country Z Agreement as mentioned above. If this is the case, paragraph (2) of Article 22 of Country Z Agreement does not apply and Australia cannot allow a tax credit for Country Z tax imposed on your employment income.

According to Article 22(1)(a) of Country Z agreement, Country Z shall allow to a resident or citizen of Country Z as a credit against Country Z tax the appropriate amount of income tax paid to Australia. You may need to seek an amendment of tax in your Country Z tax return and report your tax return properly in Australia.