Private ruling: Foreign income tax offset & flood levy
Published: October 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: The scheme commenced on 1 July 2011.

Ruling: Q1: Will the temporary flood and cyclone reconstruction levy (the flood levy ) which is imposed under section 4-10 of the Income Tax (Transitional Provisions) Act 1997 (the ITTPA 1997 ) be reduced by the foreign income tax offset ( FITO ) which is available under subsection 770-10(1) of the Income Tax Assessment Act 1997 (the ITAA 1997 )? | A1: No. The flood levy will not be reduced by the FITO.

Relevant facts and circumstances: The taxpayer is a resident of Australia and is not a resident of a country with which Australia has a double tax treaty. The taxpayer has derived foreign sourced income. The taxpayer has paid income tax in Country X on that income. That income was included in the taxpayer's assessable income for year ended 30 June 2012 ( 2012 year ). The taxpayer is liable to the flood levy and is not exempt from the flood levy.

Relevant legislative provisions: Income Tax Assessment Act 1997, s ection 4-10 | Income Tax Assessment Act 1997, s ection 63-10 | Income Tax (Transitional Provisions) Act 1997, s ection 4-10

Reasons for decision: Summary: The flood levy is not reduced by the FITO. | Detailed Reasoning - Detailed reasoning: The taxpayer was liable to pay the flood levy in the 2012 year. The taxpayer paid an amount of foreign income tax which was in excess of the basic income tax, the Medicare levy and the flood levy. The taxpayer was entitled to claim a FITO in relation to the foreign tax which was paid. The Commissioner issued an assessment for the 2012 year which allowed the FITO up to the amount of the basic income tax (excluding the flood levy) and the Medicare levy. The overall result was that the taxpayer was required to pay an amount equal to the flood levy whilst the part of the FITO which exceeded the basic income tax and the Medicare levy was wasted. Subsection 4-10(3) of the ITAA 1997 sets out the manner in which tax is calculated: Work out your income tax for the * financial year as follows: Income tax = (Taxable income × Rate) - Tax offsets | Detailed Reasoning - Step 1.: Work out your taxable income for the income year. To do this, see section 4-15 | Detailed Reasoning - Step 2.: Work out your basic income tax liability on your taxable income using: (a) the income tax rate or rates that apply to you for the income year; and (b) any special provisions that apply to working out that liability. See the Income Tax Rates Act 1986 and section 4-25 | Detailed Reasoning - Step 3.: Work out your tax offsets for the income year. A tax offset reduces the amount of income tax you have to pay. For the list of tax offsets, see section 13-1 | Detailed Reasoning - Step 4.: Subtract your * tax offsets from your basic income tax liability. The result is how much income tax you owe for the * financial year. | Detailed Reasoning - Note 1:: Division 63 explains what happens if your tax offsets exceed your basic income tax liability. How the excess is treated depends on the type of tax offset. | Detailed Reasoning - Note 2:: In addition to the income tax worked out under this section, you may also have to pay additional income tax (known as temporary flood and cyclone reconstruction levy) for the 2011-12 financial year. See section 4-10 of the Income Tax (Transitional Provisions) Act 1997 . The effect of Step 4 of the method statement in subsection 4-10(3) of the ITAA 1997 is that the FITO will reduce the basic income tax liability. However, as pointed out in Note 2, in the above quote, in addition to the basic income tax which is ordinarily calculated under subsection 4-10(3) of the ITAA 1997 you will have to pay the flood levy (if you are not exempt from the flood levy and you exceed the income thresholds). Subsections 4-10(5), (6) and (7) of the ITTPA 1997 provide: 4-10(1) You must pay extra income tax ( temporary flood and cyclone reconstruction levy ) for the 2011-12 financial year if: (a) you are an individual; and (b) your taxable income for the 2011-12 income year exceeds $50,000. ... 4-10(5) For the purpose of working out your income tax for the 2011-12 financial year, subsection 4-10(3) of the Income Tax Assessment Act 1997 has effect as if it stated that your income tax for the financial year is the total of: (a) the amount worked out using the method statement in that subsection; and (b) the amount of any extra tax you must pay as mentioned in subsection (1) of this section. 4-10(6) To avoid doubt, temporary flood and cyclone reconstruction levy is not included in your basic income tax liability worked out in accordance with step 2 of the method statement in subsection 4-10(3) of the Income Tax Assessment Act 1997 . Note: You cannot apply any tax offsets against temporary flood and cyclone reconstruction levy under Part 2-20 of the Income Tax Assessment Act 1997, because temporary flood and cyclone reconstruction levy is not included in your basic income tax liability. 4-10(7) Disregard this section for the purposes of section 770-75 of the Income Tax Assessment Act 1997 (Foreign income tax offset limit). The Revised Explanatory Memorandum to the Tax Laws Amendment (Temporary Flood and Cyclone Reconstruction Levy) Bill 2011; Tax Laws Amendment (Temporary Flood and Cyclone Reconstruction Levy) Act 2011; Income Tax Rates Amendment (Temporary Flood and Cyclone Reconstruction Levy) Bill 2011; Income Tax Rates Amendment (Temporary Flood and Cyclone Reconstruction Levy) Act 2011 (the Explanatory Memorandum ) explains: 1.14 The levy cannot be reduced by non-refundable tax offsets. That is, the taxpayer's income tax liability for the 2011-12 financial year is calculated as the taxpayer's basic income tax liability on taxable income less their tax offsets, to which the levy liability is then added. The FITO is an income tax offset which is applied against a taxpayer's basic tax but is not refundable. For instance, item 22 of the table in subsection 63-10(1) of the Income Tax Assessment Act 1936 provides: If you have one or more *tax offsets for an income year, apply them against your basic income tax liability in the order shown in the table. To the extent that an amount of a tax offset remains, the table tells you what happens to it. Order of applying tax offsets Item Tax offset What happens to any excess 22 *Tax offset for *foreign income tax under Division 770 ...To the extent that an amount of it remains, you cannot get a refund of it, you cannot transfer it and you cannot carry it forward to a later income year Section 4-10 of the ITTPA 1997 does not contain any provision that reduces the flood levy by the amount of the tax offsets (unlike step 4 of the method statement in subsection 4-10(3) of the ITAA 1997). The effect of section 4-10 of the ITTPA 1997 is that the flood levy is not reduced by tax offsets. The overall effect is that a tax offset which is not refundable, such as, the FITO, cannot reduce the amount of the flood levy. Accordingly, the FITO will reduce the basic income tax and Medicare levy but the flood levy will continue to be payable and any excess FITO is wasted. It is noted that there is no double tax treaty with Country X. Hence, it is not necessary to discuss whether foreign tax credits which are provided under various double tax treaties can be applied to reduce the flood levy: See, for example, Interpretative Decision ATO ID 2011/75.