Private ruling: Foreign income tax offset
Date of advice: 20 May 2026
Published: 3 August 2026
Ruling period: Income year ended 30 June 20YY

Ruling: Q1: Is the Taxpayer entitled to a foreign income tax offset (FITO) under subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) equal to the share of the Country A tax paid that corresponds with the proportion of the foreign gain that is included in their assessable income in Australia? | A1: No.

Relevant facts and circumstances: 1. The Taxpayer is an Australian tax resident and not a temporary resident. 2. The Taxpayer held a Country A rental property for more than X months. 3. The Taxpayer sold the Country A rental property during the 2XXX income year. 4. Under Country A tax law, the capital gain on disposal was reduced by carried-forward Country A rental losses. The resulting Country A taxable gain was approximately $XX, on which Country A taxes were paid. 5. For Australian tax, the capital gain was calculated and the 50% CGT discount under Division 115 of Income Tax Assessment Act 1997 was applied. The Australian assessable capital gain before discount was approximately $XX. After applying the 50% CGT discount, the Australian assessable amount was approximately $XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 115 | Income Tax Assessment Act 1997 Division 770 | Income Tax Assessment Act 1997 Subdivision 770-B | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 102-5(1) | Income Tax Assessment Act 1997 section 770-10 | Income Tax Assessment Act 1997 section 770-10(1) | Income Tax Assessment Act 1997 section 770-15(1)

Reasons for decision: Detailed Reasoning - Overview of the law: 6. Under section 6-5 of the ITAA 1997, an Australian resident's assessable income includes ordinary income derived from all sources, whether in or out of Australia. In addition, statutory income, including net capital gains, is included in assessable income under section 6-10 of the ITAA 1997. As an Australian resident for taxation purposes, you are therefore assessable on income and gains derived both in and out of Australia. 7. 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 FITO in Australia. 8. The FITO rules are designed to protect you from the double taxation that may arise where you pay foreign tax on income that is also taxable in Australia. This is achieved by allowing you to claim a tax offset where you have paid foreign tax on amounts included in your assessable income. 9. The FITO rules are contained in Division 770 of the ITAA 1997. 10. Section 770-10 of the ITAA 1997 is the primary provision under which a FITO arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. 11. To qualify for a FITO, you must meet all the following criteria: a. you must have paid the foreign tax on the foreign income b. the foreign tax must be a tax which you were personally liable for, and c. the income or gain for which the foreign tax was paid must be included in your assessable income for Australian income tax purposes. 12. Foreign income tax is a tax imposed by a law other than an Australian law, on income profits or gains (subsection 770-15(1) of the ITAA 1997). 13. 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. 14. ATO ID 2010/175 discusses the apportionment approach adopted regarding the FITO. It relevantly states: ...the purpose of Division 770 is to only provide a foreign income tax offset for the portion of the gain that is included in assessable income and thus subject to taxation in both Australia and the foreign country (that is, double taxation). This can be described as an 'apportionment approach' to the allowance of a foreign income tax offset. ...where a resident of Australia pays foreign income tax on the whole of a foreign capital gain but only 50% of the gain is included in the assessable income of the taxpayer in Australia because the taxpayer is entitled to the CGT discount, only 50% of the foreign income tax counts towards the foreign income tax offset under subsection 770-10(1) of the ITAA 1997. Note: an apportionment approach would also apply in other similar circumstances, for example, where only part of a foreign capital gain is assessable in Australia because the gain is subject to the small business active asset concessions in Division 152 of the ITAA 1997 or because a foreign capital gain is reduced by a capital loss under Division 102 of the ITAA 1997. Again, the amount of foreign income tax paid that counts towards the foreign income tax offset for the year under subsection 770-10(1) of the ITAA 1997 will be the proportion of the foreign tax that corresponds with the proportion of the foreign gain that is included in assessable income in Australia and thus subject to double taxation. [emphasis added] | Detailed Reasoning - Application to your circumstances: 15. The tax paid by the Taxpayer on the Country A taxable gain is 'foreign income tax' within the meaning of section 770-15 of the ITAA 1997 and is substantially equivalent to Australian income tax. 16. Under subsection 770-10(1) of the ITAA 1997, a FITO is available only for foreign income tax paid in respect of an amount included in Australian assessable income. For capital gains, the relevant Australian amount included in assessable income is the net capital gain included under subsection 102-5(1), after applying the CGT method statement, including any capital losses and the CGT discount. 17. In this case, the Australian gross capital gain on disposal of the Country A property was approximately $XX (before the CGT discount). After applying the 50% CGT discount under Division 115, the amount included in Australian assessable income (the net capital gain under subsection 102-5(1)) was approximately $XX. 18. Although the Country A taxable capital gain was reduced to approximately $XX due to the application of carried-forward Country A rental losses, the way the Country A calculates its taxable gain does not alter the amount included in Australian assessable income for the purposes of subsection 770-10(1). The relevant apportionment is therefore anchored to the Australian capital gain calculation, not a comparison between the Country A and Australian tax bases. 19. Consistent with ATO ID 2010/175 and the decision in Burton v Commissioner of Taxation [2019] FCAFC 141, the proportion of foreign tax that counts towards the FITO is determined by reference to the proportion of the Australian gross capital gain that is included in assessable income. In this case, as only 50% of the gross capital gain is included in assessable income due to the CGT discount, only 50% of the foreign income tax paid is taken to be paid in respect of an amount included in assessable income. 20. Accordingly, under subsection 770-10(1), the Taxpayer is entitled to a FITO in their XX Australian income tax return equal to 50% of the Country A federal and state taxes paid on the capital gain, subject to the foreign income tax offset limit in Subdivision 770-B of the ITAA 1997.