Private ruling: Contributions and foreign income tax off set
Date of advice: 15 October 2018
Published: December 2018
Ruling period: Financial year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are payments of foreign country A’s contributions considered foreign income tax for the purposes of subsection 770-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You worked in foreign Country A earning salary and wages. You were required to pay contributions in foreign Country A and this came out of your pay. Under the relevant scheme people who work in foreign Country A make payments towards benefits. Certain benefits are only payable if you meet the relevant conditions.

Relevant legislative provisions: Income Tax Assessment Act 1997 s ubsection 770-15(1)

Reasons for decision: Summary: According to subsection 770-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997), to count towards a foreign income tax offset, foreign income tax must be imposed under a law other than an Australian law and be: ● a tax on income; or ● a tax on profits or gains, whether of an income or capital nature; or ● any other tax that is subject to an agreement covered by the International Tax Agreements Act 1953. The foreign income tax offset 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. Paragraph 5 of Taxation Ruling IT 2437 Income tax: foreign tax credit system- foreign taxes eligible for credit against Australian income tax explains that foreign tax must be imposed on a basis substantially equivalent to that on which the Income Tax Assessment Act operates. This means that it must be imposed on the basis of a taxpayer’s net income or gains, whether of an income or capital nature. 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 contributor 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. Contributions in foreign Country A are taken out by the employer before employees get paid. This is not taken out based on a taxpayer’s net income. This means that the contributions are not ‘imposed on a basis substantially equivalent to that on which the Income Tax Assessment Act operates’ and thus does not qualify as foreign income tax. This is further supported by the commentary in the OECD’s Model Taxation Agreement that social security charges shall not be regarded as taxes on the total amount of wages. According to subsection 770-15(1) of the ITAA 1997, to count towards a foreign income tax offset, foreign income tax must be imposed under a law other than an Australian law. While the contributions are imposed under foreign Country A’s social security acts , this is not sufficient to qualify as a foreign income tax imposed under a law other than an Australian law.