Private ruling: Foreign income tax offset
Published: June 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and answers | 1. Are you entitled to a foreign income tax offset for the foreign tax paid on the remuneration you received? | Yes. | 2. Is the amount of the foreign income tax offset capped at the amount of the foreign income tax offset limit? | Yes

Relevant facts and circumstances: You are an Australian resident for tax purposes. You accepted a contract to perform work as a consultant with the government of country X. The remuneration you received under the contract was taxable in country X. Your contract stated that the government of country X would bear the cost of any taxes imposed on the remuneration you received under the contract. The payment schedules you received in relation to the contract listed the gross remuneration payable, country X tax deducted and the net amount paid to you. There is a double tax agreement between Australia and country X which has the force of law under the International Tax Agreements Act 1953.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 770-10(1) | Income Tax Assessment Act 1997 subsection 770-15(1) | Income Tax Assessment Act 1997 section 770-70 | Income Tax Assessment Act 1997 section 770-75 | Income Tax Assessment Act 1997 s ubsection 770-130(2) | Income Tax Assessment Act 1997 section 770-140 | International Tax Agreements Act 1953

Reasons for decision: Summary: Subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you are entitled to a foreign income tax offset for foreign income tax paid in respect of an amount that is included in your assessable income for the year. Foreign income tax means tax that is imposed by a law other than an Australian law, on income, profits or gains (subsection 770-15(1) of the ITAA 1997). Subsection 770-130(2) of the ITAA 1997 provides that you are taken to have paid an amount of foreign income tax in respect of a taxed amount if that foreign tax has been paid in respect of the taxed amount by another entity under an arrangement with you or under the law relating to the foreign income tax. You will be deemed not to have paid foreign income tax to the extent that you or any other associated entity become entitled to a refund of the foreign income tax (section 770-140 of the ITAA 1997). Differences between the Australian and foreign tax systems may lead to your paying foreign income tax in a different income year from that in which the income or gain is included in your assessable income for Australian income tax purposes. You might have paid the foreign tax in an earlier or later income year. However, the offset can only be claimed after the foreign tax is paid. In your case, the foreign remuneration you derived under the contract with the government of country X was taxable in country X and the government bore the cost of the tax imposed. Consequently, the foreign tax was paid by another entity under an arrangement with you and you are, therefore, taken to have paid the foreign tax. You are entitled to a foreign income tax offset for the foreign tax paid on the remuneration you derived under the contract. The availability of the foreign income tax offset is confirmed by the double tax agreement between Australia and country X which states that country X tax paid under the law of country X and in accordance with the agreement in respect of income derived by a person who is a resident of Australia from sources in country X, shall be allowed as a credit against Australian tax payable in respect of that income. The amount of the tax offset is the sum of the foreign tax that has been paid by you for the income year subject to a limit. Section 770-75 of the ITAA 1997 provides that you have to work out your foreign income tax offset limit if you are claiming a foreign income tax offset of more than $1,000. This may result in your tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to you.