Edited version of private advice

Authorisation Number: 1052331277566

Date of advice: 14 November 2024

Ruling

Subject: Foreign income tax offset

Question 1

Can you claim a foreign income tax offset (FITO) for the Levy payments that are deducted from your Country A income?

Answer

No.

Question 2

Can you claim a deduction for the Levy payments under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the followingperiods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a Country A citizen.

You are an Australian resident for income tax purposes.

You have income derived in Country A that you are required to report in your Australian income tax return to allow you to claim back tax paid in Country A, via a Foreign Income Tax Offset.

In Country A, a Government Body requires employers to deduct a Levy (the Levy) under the PAYE system.

The Government Body provides an accident insurance scheme, and the Levy covers individuals for injuries that may occur outside work.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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

Can you claim a foreign income tax offset (FITO) for the Levy payments that are deducted from your Country A income?

Summary

The Levy imposed on you is considered a payment for services, not tax. As a result, the Levy amounts deducted from your Country A income are not considered to be a foreign tax paid in accordance with the FITO requirements and you cannot claim FITO for the Levy in your Australian income tax return.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that where you are an Australian resident for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. As a resident of Australia for taxation purposes, you are assessable on your income derived both in and out of Australia and therefore, you are required to declare your Country A income on your Australian tax return.

Foreign income tax offset

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 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 ITAA 1997 as a tax imposed by law other than 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 and the International Tax Agreements Act 1953.

The foreign country Double Tax Agreements (DTA's) are contained in the International Tax Agreements Act 1953. In considering whether an amount withheld from a taxpayer's salaries 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.

Article 2 of the DTA between Australia and Country A states that Country A tax to which the convention will apply, will be on income tax and fringe benefits tax.

In interpreting the wording of a tax treaty, the Commissioner accepts the Taxation Ruling 2001/13 Income tax: interpreting Australia's Double Tax Agreements with reference to the OECD commentary on the Model Tax Convention on Income and Capital. The OECD commentary 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.).

The Levy

The Levy is a payment to a Country A accident insurance scheme, administered by the Country A Government Body, where people that are employed in Country A make payments to the Government Body through the PAYE system. The payments are national insurance contributions, and any benefit is only payable to you if you require access to the service in the event of injury.

It is possible that some taxpayers may never qualify for benefits under the ACC scheme, however, if (after satisfying all relevant conditions) a contributor is entitled to a benefit in return for contributions, those contributions would be regard as a compulsory insurance premium. The Levy is a payment you make, in return for being insured if a future event happens to you. They are not considered a payment of tax.

The Levy imposed on you is considered a payment for services, not tax. As a result, the Levy amounts deducted from your Country A income are not considered to be a foreign tax paid in accordance with the FITO requirements and you cannot claim FITO for the Levy in your Australian income tax return.

Question 2

Can you claim a deduction for the Levy payments under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The connection between the Levy and your income-earning activities is too remote and you are not entitled to claim a deduction under section 8-1 of the ITAA 1997.

Detailed reasoning

The general deduction provision in section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing that it is incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing the taxpayer's assessable income.

Various tests have been developed by case law to explain the connection (the 'nexus') between a loss or outgoing and the production of assessable income that is required to allow a deduction.

To claim a deduction under section 8-1 of the ITAA 1997, it is necessary to establish the nexus between the loss or outgoing and the production of assessable income or the carrying on of a business for the purpose of producing assessable income. The necessary nexus is sometimes referred to as a 'sufficient connection'. This requires that the loss or outgoing:

1.     Be 'incidental and relevant' to the taxpayer's income producing/business operations (Ronpibon Tin NL v FC of T (1949) 8 ATD);

2.     Have the 'essential character' of an income producing/business expense (Lunney v FC of T; Hayley v FC of T (1958) 11 ATD 404); or

3.     Have a 'perceived connection' with the gaining or producing of income (FC of T v Hatchett 71 ATC 4184).

In general terms, a deduction is allowed where the expenditure is necessary and has been incurred to enable or assist a taxpayer in their current income producing activities. The Levy imposed on you by the Government Body is not incurred as an expense that facilitates your ability to carry out your employment. The expense is too general in that the nature of your income producing activities would not affect your requirement to contribute to the Levy.

The connection between the Levy and your income-earning activities is too remote and you are not entitled to claim a deduction under section 8-1 of the ITAA 1997.