Private ruling: Foreign income tax offset
Date of advice: 27 August 2015
Published: August 2015
Ruling period: 1 July 2014 to 30 June 2016.
Date scheme commenced: 1 July 2014.

Ruling: Question and answer: | Are you entitled to a foreign income tax offset for amounts withheld in a foreign country that are included in your assessable income in Australia as your personal services income? | Yes.

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You have a contract (the contract) to do some work in a foreign country. You are deriving income in the form of payments for the services you are providing under the contract. You are providing those services in the foreign country. The income derived under the contract is your personal services income. The income is included in your assessable income in Australia under the personal services income provisions of the tax law. Amounts are being withheld under the tax law of the foreign country from the payments for services you are providing under the contract.

Relevant legislative provisions: Income Tax Assessment 1997 Section 6-10 | Income Tax Assessment 1997 Section 10-5 | Income Tax Assessment 1997 Section 84-5 | Income Tax Assessment 1997 Section 86-15 | Income Tax Assessment 1997 Section 770-10 | Income Tax Assessment 1997 Section 770-15 | Income Tax Assessment 1997 Section 770-130 | International Tax Agreements Act 1953 Section 5 | International Tax Agreements Act 1953 Section 7

Reasons for decision: Detailed Reasoning - Entitlement to a foreign income tax offset - general: To be entitled to a foreign income tax offset (FITO): • an entity must have actually paid (or be deemed to have paid) an amount of foreign income tax, and • the income on which the foreign income tax is paid must be included in the Australian assessable income of the entity wanting to claim the FITO. In some cases, foreign tax may be paid by one entity (a company for example) on income that is included in the Australian assessable income of an individual because of the application of the tax law. An example of this is when the income of a company is treated as the personal services income of an individual and is included in the assessable income of that individual under the provisions of section 86-15 of the Income Tax Assessment 1997 (ITAA 1997). When this happens, subsections 770-130(1) and (2) of the ITAA 1997 provide that the individual is considered to have paid the foreign tax on the amount included in their assessable income if that foreign tax was paid by the other entity under the law relating to the foreign tax. You are deriving income in the form of payments for services you are providing under the contract and amounts are being withheld from those payments under the tax law of the foreign country. The income your are deriving under the contract is your personal services income and is included in your assessable income in Australia as statutory income under the provisions of sections 6-10, 10-5 and 86-15 of the ITAA 1997. Considering the above, you are considered to have paid foreign tax on the amounts of personal services income that will be included in your assessable income. However, in order to determine your entitlement to a FITO, it is necessary to establish whether or not the amounts being withheld constitute foreign income tax for the purposes of the FITO. | Detailed Reasoning - Foreign tax paid must be foreign income tax: For a FITO to be allowed the foreign tax paid must qualify as foreign income tax. Foreign income tax is defined in subsection 770-15(1) of the ITAA 1997 as tax that is imposed by a law other than an Australian law and is: • 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 (such as a tax treaty) covered by the International Tax Agreements Act 1953 (Agreements Act). Importantly, in cases where there is a tax treaty between Australia and the country where foreign tax has been paid, the note to subsection 770-15(1) of the ITAA 1997 states: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953 ), has been correctly imposed in accordance with that tax treaty. Australia has a tax treaty with the other country (the Agreement). The Agreement has the force of law under the provisions the Agreements Act. Considering the above, to determine whether or not you are entitled to a FITO in respect of the amounts withheld in the other country we must establish whether or not those amounts: • satisfy the definition of 'foreign income tax' in subsection 770-15(1) of the ITAA 1997, and • are being withheld in accordance with the provisions of the Agreement. We consider the amounts being withheld do meet the definition of foreign income tax in subsection 770-15(1) of the ITAA 1997 because the amounts are being withheld under the tax law of the other country and are being withheld on amounts that are your personal services income. On the basis that the amounts withheld are being withheld in respect of income that is your personal services income, the provisions of Article 11 of the Agreement must be considered. In simple terms, Article 11 of the Agreement: • provides taxing rights to Australia on the personal services income of individuals who are residents of Australia for taxation purposes, regardless of whether the services are carried out in Australia or the other country, and • on the basis that any remuneration or income from services provided in the other country is deemed to have a source in that country and may be taxed there, also provides the other country with taxing rights in respect of the personal services income of a resident of Australia who provides those services in that country. Regarding income that is deemed to have a 'source' in the other country, Article 18 of the Agreement provides that tax paid in the other country, whether directly or by deduction, in respect of income derived by a resident of Australia from sources within that country shall be allowed as a credit against Australian tax payable in respect of that income. You are providing the services under the contract in the other country. Accordingly, we consider the amounts withheld in that country for those services constitute a tax correctly imposed in accordance with the Agreement. | Detailed Reasoning - Conclusion: You are entitled to a FITO for amounts withheld in the other country from payments made to you that are included in your assessable income in Australia as your personal services income under the provisions of section 86-15 of the ITAA 1997, but only to the extent the amounts withheld relate to income from services provided in the other country under the contract.