Private ruling: Foreign dividend and foreign income tax offset
Date of advice: 17 June 2016
Published: August 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Are the dividends you will receive from a private company in Country A, assessable income in Australia? | A1: Yes | Q2: Will you be entitled to a foreign income tax offset (FITO) for the foreign tax paid? | A2: Yes

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are the sole shareholder of a private company based in Country A. The company is in receipt of a capital gain. The company plans to pay you a dividend that will be taxed at 15 per cent in Country A.

Relevant legislative provisions: Income Tax Assessment Act 1997 sections 6-10, 10-5, 770-10, 770-15, | Income Tax Assessment Act 1936 sections 6 and 44, and | International Tax Agreements Act 1953 sections 4 and 5.

Reasons for decision: Detailed Reasoning - Assessability of dividend: Subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes statutory income from all sources, whether in or out of Australia. Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 44 of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with dividends. Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder of a company, whether the company is a resident or a non-resident, shall include dividends paid by the company out of profits derived by it from any source. In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. 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 A Agreement is listed in section 5 of the Agreements Act. Article 10 of the Country A Agreement provides that dividends paid by a company, which is a resident of Country A for tax purposes, to a resident of Australia, may be taxed in Australia. The dividends may be taxed in Country A; however the tax charged by Country A shall not exceed 15 per cent of the dividend. As you are a resident of Australia, the dividend received from a private company in Country A is assessable in Australia, under subsection 6-10(4) of the ITAA 1997. | Detailed Reasoning - Foreign income tax offset: Subsection 770-10(1) of the ITAA 1997 provides for a FITO for an income tax year for foreign income tax paid in respect of an amount that is included in assessable income. Section 770-15 of the ITAA 1997 defines 'foreign income tax' to include a tax on income, profits or gains, whether of an income or capital nature, or any other tax being a tax that is subject to an agreement having the force of law under the Agreements Act, that is imposed by a law other than an Australian law. A note to section 770-15 of the ITAA 1997 points out that 'foreign income tax' includes only that which has been correctly imposed under the foreign law, and where the foreign jurisdiction has a tax treaty with Australia under the Agreements Act, foreign income tax includes only tax which has been correctly imposed under the treaty. To be entitled to a FITO you must have actually paid, or be deemed to have paid, an amount of foreign income tax and the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes. In your case, you are an Australian resident for taxation purposes who will pay tax in Country A under Country A law on assessable income earned in that country. You will therefore be entitled to a FITO once you have paid the tax in Country A.