Private ruling: Foreign income
Date of advice: 21 September 2017
Published: February 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Question and answer | 1. Is the income you received from employment in Country A assessable in Australia? | Yes. | 2. Are you entitled to receive a foreign income tax offset in relation to the foreign tax paid in country A on your salary? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are Country A citizen and began work in Australia from 1 July 2017. From # – # you worked on a number of sales opportunities and earned sales commissions on closed deals. Your sales commissions were not paid to you until you were an Australian resident for tax purposes. Your income of $ was taxed in country A $.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 770-10 | Income Tax Assessment Act 1997 Subsection 770-10(1) | Income Tax Assessment Act 1997 Section 770-75 | Income Tax Assessment Act 1997 Subsection 770-75(1) | Income Tax Assessment Act 1997 Subsection 770-75(2)

Reasons for decision: Summary: If you are an Australian resident for tax purposes, you are taxed on your worldwide income, so you must declare any foreign income in your income tax return. As your foreign income may also be taxed in the source country, it is potentially subject to double taxation. To overcome this, Australia has a system of credits and exemptions and has signed tax treaties with more than 40 countries, including all our major trade and investment partners. Article # of the Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income states that income that has it’s source in Country A, is taxable in country A. In your case you received income which was sourced in Country A once you returned to Australia and were a resident of Australia for tax purposes. This means that this income may be taxed in Country A and in Australia because there are no provisions which exempt the income from taxation in either country. Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. As an Australian resident, you are taxed on your worldwide income, including your income from: ● offshore bank accounts ● interests in foreign entities ● rental income from overseas property ● capital gains on overseas assets. You must declare income from these sources in your Australian tax return for the income period in which it was received (in your case 2017/18). If you have paid tax on any of this income in another country, you can claim a foreign income tax offset (FITO) in Australia. 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. | Detailed Reasoning - Foreign income tax offset: Subsection 770-10(1) of the ITAA 1997 provides the basic entitlement rule for a foreign income tax offset (FITO) and states: You are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. 1. 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. In your case you will need to include an amount of $ (tax paid in country A) in your assessable income. 2. 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. 3. The FITO rules do not allow for the carry forward of excess foreign tax. This means that all available FITOs will need to be utilised in the year in which they arise. There will be no opportunity to carry them forward for use against future Australian tax on foreign income. 4. Furthermore, there is a FITO limit. Where the total foreign income tax paid by a person is less than or equal to $1,000, the person is not required to calculate the FITO, i.e. the person's FITO will equal the foreign income tax paid on amounts included in the their assessable income. 5. Where the total foreign income tax paid is more than $1,000, the person can choose to offset only $1,000 of foreign tax (and not formally calculate the FITO entitlement) or calculate the offset limit to determine the maximum FITO entitlement under section 770-75 of the ITAA 1997. | Detailed Reasoning - Note: Further information regarding calculating a FITO can be obtained on our website by searching for Guide to foreign income tax offset rules 2017 which can be obtained from the ATO website www.ato.gov.au.