Private ruling: Foreign income
Published: April 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Question and answer: | Are you entitled to a foreign income tax offset (FITO)? | Yes.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You worked in country X and contributed to a superannuation fund. You withdrew your superannuation after you finished working and left country X. You were paid a lump sum and tax was taken out.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 770-10 | International Tax Agreements Act 1953

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that where you are an Australian resident for taxation purposes, your assessable income includes income gained from all sources, whether from within or outside of Australia. In determining your liability to pay tax in Australia we not only have to consider the domestic income tax laws but also the double tax agreement between Australia and country X. This agreement with country X (country X agreement) ensures that income received by residents of Australia or country X can avoid paying tax twice on the same income earned in either country. Article 23 of country X agreement explains that a credit for any tax paid in country X will be allowed against Australian tax paid on income from country X. | Detailed Reasoning - Foreign income tax offset: A foreign income tax offset (FITO) is a non-refundable tax offset, and will reduce the Australian tax that is payable on the foreign income which has already been subjected to foreign income tax. Under section 770-10 of the ITAA 1997, to qualify for an offset, you must have paid foreign income tax on an amount that is included in your Australian assessable income for that year. As the payment from country X is assessable to you in Australia, the tax you paid on this income is used to calculate your allowable foreign income tax offset in Australia. The offset is based on the total foreign income tax paid, however, it is limited to the total amount of Australian income tax that would have been payable on the relevant income. If claiming an offset of $1,000 or less, you only need to record the actual amount of foreign income tax paid on your assessable income (up to $1,000). When claiming a FITO of more than $1,000 you need to calculate your foreign income tax offset limit. To make this calculation you need to work out the income tax payable by you (including Medicare), disregarding any other tax offsets you may be entitled to. To make this calculation you will need to include any deductions related to your income to which you are entitled. For further information and assistance, please refer to the Guide to foreign income tax offset rules available on our website www.ato.gov.au.