Private ruling: Foreign income tax offset
Published: February 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will your foreign income tax offset be limited to reducing your basic Australian tax liability to nil? | A1: Yes. | Q2: Will you be refunded any excess foreign income tax offset? | A2: No.

Relevant facts and circumstances: You are employed by an Australian resident company. Your current employment contract commenced during the 2013-14 financial year and will continue for approximately six months. You are employed on a cyclical work arrangement which operates on a 30 day cycle as follows: · 28 days on site, · 2 days travel to and from the site, · then 7 days of R &R. You are a resident of Australia for income tax purposes whilst you are working in country X. You are being taxed at a higher rate of tax in country X than the rate of tax you pay in Australia.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 13-1 | Income Tax Assessment Act 1997 Section 63-10 | Income Tax Assessment Act 1997 Section 63-23 | Income Tax Assessment Act 1997 Division 770 | International Agreements Act 1953 Section 5 Agreement between Australia and the Country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income Articles 15 and 23

Reasons for decision: Summary: All references are to the Income Tax Assessment Act 1997. | Detailed Reasoning - Assessable income of an Australian resident: As you are aware, section 6-5 advises that as a resident of Australia for taxation purposes, your assessable income includes the income you have earned from all sources, whether in or out of Australia. You are currently employed by an Australian resident company on a cyclical work arrangement in country X. In determining whether this income is assessable in Australia and/or country X, it is necessary to consider not only the Australian domestic income tax laws but also any applicable double tax agreement that exists between Australia and country X. The agreement between Australia and country X (the agreement) is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database and operates to avoid the double taxation of income received by residents of Australia and country X. The agreement is given the force of law domestically under section 5 of the International Agreements Act 1953 (the Agreements Act) and overrides domestic taxation laws in cases where there are any inconsistencies. One Article of the agreement explains that the salary and wages of an Australian resident will be taxable only in Australia unless the employment is exercised in country X. In addition, that Article explains that being present in country X in excess of 90 days of their financial year also gives country X the right to tax your income. You are a resident of Australia and your employment is being exercised in country X. The employment is based on a 30 day cyclical arrangement for approximately six months. You will be exercising the employment in country X in excess of 90 days and therefore, in line with the agreement, the salary and wages you earn may be taxed in both Australia and country X. Methods of elimination of double taxation Another Article of the agreement entitles an Australian resident to a credit for tax paid on country X sourced income to reduce their income tax liability. As a resident of Australia for taxation purposes, you will be entitled to a foreign income tax offset to reduce the amount of tax you are required to pay in Australia. Tax offsets and priority rules A tax offset is a taxation concession given to eligible taxpayers which reduces their basic income tax liability. Section 13-1 contains a list of all available tax offsets. If you are eligible to receive more than one offset during a financial year they are applied in the order set out in the table under section 63-10. If there is any amount of tax offset remaining, the table also sets out what happens with the excess. If your total tax offsets exceed your basic Australian income tax liability, and some of those offsets are subject to the refundable tax offset rules, you may get a refund instead of paying income tax. Section 63-23 lists those tax offsets that are subject to the refundable tax offset rules. Foreign income tax offset The foreign income tax offset (FITO) system is contained in Division 770. The amount of the foreign income tax offset is subject to the foreign income tax offset limit calculated in accordance with section 770-75. The FITO is not listed as a refundable tax offset. The effect of not being listed means that the FITO is a non-refundable offset. Non-refundable tax offsets can only reduce the amount of Australian tax payable to nil and will not produce a refund. In addition the FITO rules do not allow you to carry forward any excess foreign tax. This means that all available FITOs need to be utilised in the year in which they arise. You are not able to carry them forward for use against future Australian tax on foreign income. However, subsection 63-10(1) explains that any FITO amount remaining after being applied against your basic Australian income tax liability may be applied against your Medicare levy liability (including any liability for the surcharge). Example: Eloise is an Australian resident who earns $11,100 working overseas, from which $2,200 was deducted in tax. Her other taxable income for the year is $34,000. Eloise is entitled to a foreign income tax offset under Division 770. The amount of the offset is essentially the Australian income tax that would be payable on her foreign source net income or the actual foreign tax paid, whichever is the lesser amount. The Australian income tax that would be payable on her foreign source net income is calculated as the difference between the Australian income tax payable in the income year less the amount of tax that would have been payable in the income year if the foreign source income (and its associated deductions) were excluded. Australian income tax payable on actual taxable income of $45,100 at 2013-14 rates is $6,204.50. The Medicare levy on $45,100 is $676.50. Australian income tax that would have been payable if foreign income was excluded, i.e. tax on $34,000 ($45,100 - $11,100) at 2013-14 rates is $3,002. The amount of the foreign tax paid = $2,200. The maximum FITO that can be claimed is the lesser of $2,200 and $3,202.50 (i.e. $6,204.50 - $3,002). Therefore, the Australian tax payable (excluding Medicare levy) after taking account the FITO is $4,004.50 ($6,204.50 - $2,200). The total tax liability (including Medicare levy) is $4,004.50 + $676.50 = $4,681. | Detailed Reasoning - Conclusion: You will not be refunded the difference between your country X tax liability and your Australian tax liability. However, any FITO remaining after being applied against your Australian income tax liability will be applied against your Medicare levy liability.