ATO Interpretative Decision

ATO ID 2008/57

Income Tax

Foreign tax credit: capital gain from the sale of asset situated in the USA by a dual resident of Australia and the USA
FOI status: may be released
  • This ATO ID has been amended to replace the repealed subsection 160AF(1) by subsection 770-10(1). The term 'foreign tax credit' is also replaced by 'foreign income tax offset'. With effect from 1 July 2008 the foreign tax credit system contained in Div 18 of the Income Tax Assessment Act 1936 has been replaced by the foreign income tax offset system contained in Div 770 of the Income Tax Assessment Act 1997.
    This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
    Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is Australia obliged to provide credit relief pursuant to Article 22 of the Double Tax Agreement between Australia and the United States of America (USA Convention) for the tax paid in the USA on the capital gain made from the sale of units in a limited partnership by an Australian resident?

Decision

No. Australia is not obliged to provide credit relief pursuant to Article 22 of the USA Convention for the tax paid in the USA on the capital gain made from the sale of units in a limited partnership by an Australian resident.

Facts

The taxpayer is a citizen of the USA and, on this basis, a resident of the USA for taxation purposes.

The taxpayer was a resident of Australia for taxation purposes.

The taxpayer's habitual abode and personal and economic ties were predominantly in Australia during the period.

The taxpayer sold units in a limited partnership situated in the USA and paid tax in the USA on the capital gain solely based on the US citizenship.

The taxpayer, as an Australian resident, was also assessed in Australia on this capital gain.

Reasons for Decision

Subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where the assessable income of a resident contains foreign income and foreign tax has been paid on that income, a foreign income tax offset will be allowed.

In determining Australia's obligation to provide credit relief under its domestic law for foreign taxes paid on foreign income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates the Agreements Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one.

Schedule 2 to the Agreements Act contains the double tax convention between Australia and the USA (USA Convention). Schedule 2A to the Agreements Act contains the United States Protocol (US Protocol). The USA Convention and the US Protocol operates to avoid the double taxation of income received by Australian and US residents.

The taxpayer was a resident of Australia. The taxpayer was a citizen of the USA and, on this basis, also a resident of the USA. As the taxpayer's habitual abode and personal and economic ties were predominantly in Australia, the taxpayer will be treated as a resident of Australia for the purposes of applying the provisions of the USA Convention.

The taxpayer disposed of units in a limited partnership in the USA and realised a capital gain. The capital gain made from the sale of units in a limited partnership situated in the USA is not dealt with in any article of the USA Convention, including the Business Profits Article 7, the Alienation of Property Article 13 or the Other Income Article 21.

Paragraph 3 of Article 1 of the USA Convention provides that, notwithstanding any provision of this Convention, with some exceptions that are not relevant to this case, a Contracting State may tax its residents and individuals electing under its domestic law to be taxed as residents of that State, and by reason of citizenship may tax its citizens, as if the USA Convention had not entered into force. Accordingly, the capital gain made from the sale of units in a limited partnership situated in the USA has been taxed by the US solely on the basis of citizenship under the USA Convention. Australia, as the country of residence of the taxpayer, also has a taxing right under the USA Convention and has taxed the gain under the capital gain tax provisions.

Article 22(2) of the USA Convention provides that United States tax paid under the law of the United States and in accordance with this Convention in respect of income derived from sources in the United States 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. However, the Article specifically excludes, for the purposes of such credit, United States tax imposed in accordance with paragraph 3 of Article 1 solely by reason of citizenship.

Article 22(4) of the USA Convention states that for computing United States tax, where the United States citizen is a resident of Australia, the United States shall allow as a credit against United States tax the income tax paid to Australia after the credit referred to in paragraph (2).

Accordingly, Australia is not obliged to provide credit relief pursuant to Article 22 of the USA Convention for the tax paid in the USA on the capital gain made from the sale of units in a limited partnership by an Australian resident.

Date of decision:  4 April 2008

Year of income:  Year ended 30 June 2008

Legislative References:
Income Tax Assessment Act 1997
   770-10(1)

International Tax Agreements Act 1953
   section 4
   Schedule 2, Article 1(3)
   Schedule 2, Article 7
   Schedule 2, Article 13(1)
   Schedule 2, Article 21

Related Public Rulings (including Determinations)
Taxation Ruling IT 2562

Related ATO Interpretative Decisions
ATO ID 2007/173

Other References:
OECD Model Tax Convention on Income and Capital

Keywords
Double tax agreements
Foreign income tax offset
United States

Siebel/TDMS Reference Number:  5766218

Business Line:  Public Groups and International

Date of publication:  18 April 2008

ISSN: 1445-2782