Private ruling: Foreign taxes
Published: February 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Questions and Answers | 1. Are you entitled to an income tax deduction for the following amounts shown on your payslip of the foreign company with whom you are employed: | • Contribution for income insurance in the foreign country? | Yes | 2. Are you entitled to a foreign income tax offset (FITO) for the following amounts shown on your payslip of the foreign company with whom you are employed: | • Public health insurance levy in the foreign country | • Deficit levy in the foreign country | • Government social charges in the foreign country? | Yes | 3. Are you entitled to an income tax deduction or FITO for the following amounts shown on your payslip of the foreign country with whom you are employed: | • Contribution for retirement benefit in the foreign country | • Private health insurance premium in the foreign country? | No

Relevant facts and circumstances: You are a foreign resident for income tax purposes. You are a temporary resident of Australia for income tax purposes working under a 457 visa. You are employed by a foreign company in Australia. You supplied copies of payslips relating to the 2014 income year. The payslips contain details of various amounts withheld for the foreign country's social security contributions and other purposes. You provided the following information in relation to the various withholding amounts from your salary: • Contribution for income insurance in the foreign country • Public health insurance levy in the foreign country • Deficit levy in the foreign country • Government social charges in the foreign country • Contribution for retirement benefit in the foreign country • Private health insurance premium in the foreign country? Two of the amounts shown on your payslip are components of the foreign country's government's social charges, both of which are specifically identified in an Article of the foreign country's double tax agreement (DTA).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 770-15 | Income Tax Assessment Act 1997 Section 770-70 | Income Tax Assessment Act 1997 Section 8-1 | International Tax Agreements Act 1953

Reasons for decision: Detailed Reasoning - Foreign income tax offset (FITO): A taxpayer whose assessable income in Australia is also subject to foreign income tax and who has, or is deemed to have, paid the foreign income tax in the income year may be entitled to a foreign income tax offset (FITO) in Australia. The concept of 'foreign income tax' is intended to cover foreign taxes imposed on a basis that is substantially equivalent to income tax imposed under Australian law. 'Foreign income tax' is defined in section 770-15 of the Income Tax Assessment Act 1997 (ITAA 1997) as a tax imposed by a law other than an Australian law that is: • tax on income; or • tax on profits or gains, whether of an income or capital nature; or • any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953. The foreign country DTA is contained under the International Tax Agreements Act 1953 . In considering whether an amount withheld from a taxpayer's salary is a 'foreign income tax', it is necessary to consider the basis on which the amount is withheld and any future benefit the taxpayer might derive in respect of the withheld amount. Substantial, not exact, equivalence to Australian income tax is required. Any tax covered by a relevant country's DTA is necessarily a 'foreign income tax'. | Detailed Reasoning - Deductibility: An amount withheld may not be foreign income tax but may be incurred by the employee in gaining or producing the assessable salary income. To determine if a withheld amount is deductible for the purpose of determining Australian taxable income, the ordinary tests of deductibility apply. An amount is allowed as a deduction if it is directly related in earning assessable income. The amount must not be a private, domestic or capital expense. We shall now consider each of the amounts shown on your payslip is eligible for a FITO or a tax deduction. | Detailed Reasoning - Public health insurance levy: It is accepted that any part of these amounts being a public health insurance levy are substantially equivalent to the Medicare levy, which is imposed as an element of Australian income tax. It is accepted that any part of those amounts which are directed to funding the foreign country's public pension system would be substantially equivalent to ordinary Australian income tax. You are entitled to claim a FITO in respect of these amounts, subject to any relevant limit for the income year. | Detailed Reasoning - Foreign country deficit levy: This amount is a general levy analogous to levies imposed under the Australian income tax system (such as the 'deficit levy'). It is substantially equivalent to income tax. You are entitled to a FITO in respect of this amount, subject to any relevant limits. | Detailed Reasoning - Social charges: Two of the amounts shown on your payslip are components of the foreign country's government's social charges, both of which are specifically identified in an Article of foreign country's DTA. They are therefore 'foreign income taxes' as defined in the ITAA 1997 and you are entitled to a FITO in respect of these amounts, subject to any relevant limits. | Detailed Reasoning - Contribution for income insurance in the foreign country: It is accepted that, as the income insurance contributions are analogous to income protection insurance premiums, they are deductible from assessable income to the extent that they may provide the taxpayer with future periodic (that is, not lump sum) benefits. You are entitled to claim and income tax deduction for your income insurance contribution and not a FITO. | Detailed Reasoning - Contribution for retirement benefit in the foreign country: Contributions for retirement benefit in the foreign country are similar to deductions which relate to the undeducted purchase price (UPP) of a pension. So, whilst the contributor is not able to deduct the contributions whilst in employment, the undeducted amounts become deductible once the person starts to draw pension income. These amounts are not deductible, as you are currently employed. In addition, the amounts are not substantially equivalent to a tax on income and do not give rise to a FITO. | Detailed Reasoning - Private health insurance premium in the foreign country: These amounts are analogous to private health insurance premiums rather than to the Medicare levy, as the amounts contributed determine the employee's entitlement to health insurance benefits. As private health insurance premiums are not deductible, these amounts are likewise not deductible. Also, these amounts are not substantially equivalent to a tax on income and do not give rise to a FITO. | Detailed Reasoning - Conclusion: You are entitled to claim a tax deduction for: • Contribution for income insurance in the foreign country You are entitled to claim a FITO for: • Public health insurance levy in the foreign country • Deficit levy in the foreign country • Government social charges in the foreign country You are not entitled to a tax deduction or FITO for: • Contribution for retirement benefit in the foreign country • Private health insurance premium in the foreign country.