Private ruling: Foreign income tax offset
Published: July 2013
Ruling period: Year ending 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Question and answer | Are you entitled to a foreign income tax offset for tax paid to country X on income earned while working Australia? | No.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You were employed by a organisation in Australia and carried out work in Australia and country X. You were considered to be a resident for taxation purposes in country X for the period of the work. Your income derived during the period was taxed in Australia as a resident taxpayer. You have been taxed on all of the income for the period as a resident of country X for taxation purposes. Your permanent home is in Australia. Your family and economic ties are with Australia. You only go to country X for work purposes.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 770-15(1) | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Section 5 | International Tax Agreements Act 1953 Article 4 | International Tax Agreements Act 1953 Article 15

Reasons for decision: Summary: Sub section 770-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines foreign income tax as meaning tax that: (a) is imposed by a law other than an Australian law; and (b) is: (i) tax on income; or (ii) tax on profits or gains, whether of an income or capital nature; or (iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953 (Agreements Act). Note: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the Agreements Act), has been correctly imposed in accordance with that tax treaty. In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. You state you are a resident of both Australia and country X for taxation purposes. Accordingly, the double tax agreement between Australia and country X will need to be considered to determine who has the taxing rights on your income for the work carried out in Australia and to determine if the foreign tax has been correctly imposed. Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The country X Agreement (the Agreement) is listed in section 5 of the Agreements Act. The Agreement operates to avoid the double taxation of income received by residents of Australia and country X. Article Y of the Agreement considers residency for the purposes of the Agreement, particularly when a taxpayer is a resident under the domestic tax laws of both Australia and country X. It states that: 1. For the purposes of this Agreement, a person is a resident of a Contracting State: (a) in the case of Australia, if the person is a resident of Australia for the purposes of Australian tax; and (b) in the case of country X, if the person is liable, under the law of country X, to tax therein by reason of the person's domicile, residence, place of management or any other criterion of a similar nature. 2. A person is not a resident of a Contracting State for the purposes of this Agreement if the person is liable to tax in that State in respect only of income from sources in that State. 3. Where by reason of the preceding provisions of this Article a person, being an individual, is a resident of both Contracting States, then the status of the person shall be determined in accordance with the following rules: (a) the person shall be deemed to be a resident solely of the Contracting State in which a permanent home is available to the person; (b) if a permanent home is available to the person in both Contracting States, or in neither of them, the person shall be deemed to be a resident solely of the Contracting State with which the person's economic and personal relations are closer. You only have a permanent home available to you in Australia. Your family and economic ties are with Australia and not country X. Therefore you are an Australian resident for taxation purposes for the purposes of the Agreement under Article 4 of the Agreement. Article Z considers the tax treatment of dependent personal services and states that: Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by an individual who is a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in that other State. Under Article Z of the Agreement and as you are an Australian tax resident for the purposes of the Agreement, you are only taxable in Australia on the income you derived while carrying out work in Australia. As Country X has no taxing rights in relation to this income and any tax imposed by Country X is not in accordance with the Agreement, no foreign income tax offset is available to you for any income tax paid to Country X on this income under section 770-15(1) of the ITAA 1997.