Private ruling: Foreign tax offset
Published: March 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Questions and answers | Are you entitled to a foreign tax offset for withholding tax paid overseas? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You act as trustee for two Unit Trusts. You recently sold some of your products to an overseas client. The overseas client did not withhold any tax and has requested you to pay this to them. You are required to refund XX% withholding tax to the overseas client in accordance with the double tax agreement between Australia and the overseas country. You intend on paying the withholding amount to the overseas client.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 770-10 | Income Tax Assessment Act 1997 section 770-15 | International Tax Agreements Act 1953 Section 5

Reasons for decision: Summary: To qualify for a foreign income tax offset under section 770-10 of the ITAA 1997 you must of paid foreign income tax on an amount that is included in your Australian assessable income for that year. Foreign income tax is a tax imposed by a law other than an Australian law, on income profits or gains (subsection 770-15(1)(a) of the ITAA 1997 and Subsection 770-15(1)(b)(iii) any other tax, being a tax that is subject to an agreement having force of law under the International Tax Agreements Act 1953 (Agreements Act). In determining the availability of a foreign income tax offset it is necessary to consider not only the income tax laws but also any applicable tax treaties contained in the Agreements Act. 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 Y Agreement is listed in section 5 of the Agreements Act. The Country Y agreement operates to avoid the double taxation of income received by residents of Australia and Country Y. Article XX of the country Y Convention provides that where country Y tax has been imposed in respect of Country Y -sourced income in accordance with Article 1 of the country Y Convention (other than Country Y tax imposed solely by reason of citizenship or by reason of an election by an individual under country Y domestic law to be taxed as a resident of Country Y , in respect of income derived from sources in Country Y ) by a resident of Australia shall be allowed, a credit against Australian tax payable on that income. The credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as it may be in force. Article X (1) of the Country Y Convention identifies the taxes to which the Convention shall apply. The country Y tax covered by the Convention is the Income tax for individuals and corporations tax. Article X (2) of the Country Y Convention states that the Convention shall also apply to any identical or substantially similar taxes which are imposed by either Australia or Country Y after the date of signature of this Convention, in addition to existing taxes in place. At the end of each calendar year, the competent authority of each country shall notify the competent authority of the other of any substantial changes made during the year. Article XX considers tax on royalties. It states: (1) Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. (2) Such royalties may be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed 10 per cent of the gross amount of the royalties. (3) The term "royalties" in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for: (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right; You are required to pay withholding tax in Country Y and your foreign income is assessable in Australia, FITO will be available for the withholding tax subject to the FITO limits.