ATO ID 2008/57: Foreign tax credit: capital gain from the sale of asset situated in the USA by a dual resident of Australia and the USA
Date of decision: 4 April 2008
Year of income: Year ended 30 June 2008
Business line: Public Groups and International

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
Summary: 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.

Legislative references: Income Tax Assessment Act 1997 770-10(1)
Related public rulings and determinations: Taxation Ruling IT 2562
Related ATO interpretative decisions: ATO ID 2007/173
Other references: OECD Model Tax Convention on Income and Capital
Subject references: Double tax agreements Foreign income tax offset United States