Private ruling: Foreign income tax offset
Published: September 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | The scheme commence on: | 1 July 2012
Date scheme commenced: 1 July 2012

Ruling: Questions and answers: | 1. Is the foreign country Government's compulsory deduction a 'substantially similar' tax to the existing taxes in that country under the double tax agreement? | No. | 2. Are you entitled to a foreign income tax offset for the amount of the compulsory deduction? | No.

Relevant facts and circumstances: You are an Australian citizen who is an Australian resident for taxation purposes. You have moved to a foreign country for 12 months and you are employed there on a salary. From your foreign gross salary each fortnight a number of items are deducted including in addition to income tax. Certain contributions go to a Fund which helps pay for welfare benefits and pensions in that foreign country. Most employees pay their contributions through the foreign country's PAYE system.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 770 | International Tax Agreements Act 1953 Paragraph Sch20-Art 25(1 ) | International Tax Agreements Act 1953 Sch20-Art2

Reasons for decision: Summary: The foreign income tax offset (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. The FITO rules are contained in Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Tax treaty: As you have pointed out Australia has a tax treaty with the foreign country in which you are working that operates to avoid double taxation. An Article of the Agreement provides that existing taxes to which the Agreement shall apply in Australia are the Australian income tax, including the additional tax upon the undistributed amount of the distributable income of a private company. In the foreign country, it applies to the income tax, the corporation tax, and the capital gains tax. The Agreement also applies to any identical or substantially similar taxes which are imposed after the date of signature of the Agreement. A further Article of the Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in the foreign country in accordance with the Agreement will be allowed against Australian tax payable on income from that foreign country's sources. | Detailed Reasoning - Compulsory contribution: The deductions referred to are compulsory for employees. Where a person makes a compulsory contribution to a levy which will be used to provide benefits for that person in the future, that contribution is more akin to a payment for services than a payment of tax. For instance, if a taxpayer makes a contribution to an unemployment fund and is entitled to unemployment benefits as a result of making those contributions, the contributions have the character of compulsory insurance instead of a tax. It is possible that some taxpayers may never qualify for benefits under the scheme as they may never become unemployed, incapacitated, attain old age or they may never have a large family. However, if (after satisfying all the relevant conditions) a contributor is entitled to a benefit in return for the contributions, those contributions would be more appropriately regarded as compulsory insurance premiums. They are payments which are made in return for being insured against the happening of a future event. They are not regarded as the payment of tax. Therefore, the contributions are not considered to be a foreign tax paid when working out entitlement to a foreign income tax offset. | Detailed Reasoning - Income periods: You have stated that your ruling ought not be time limited to any accounting period. Taxation Ruling TR 2006/11 Private Rulings explains that the Commissioner limits the life of a private ruling because of the possibility that laws may change or a subsequently issued public ruling may override a private ruling the Commissioner issues to you. In these circumstances a ruling that had been issued to you would no longer apply and could no longer be relied upon.