Private ruling: Income - Tax offset
Published: December 2012
Ruling period: 1 July 2011 to 30 June 2012

Ruling: Q1: Are you entitled to claim a foreign tax credit in respect of the social security charges deducted from your foreign Salary? | A1: No. | Q2: Are you entitled to claim an income tax deduction for the social security charges deducted from your foreign Salary? | A2: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are employed by an Australian company and carry out employment duties in a foreign country. You pay both Australian PAYGW and foreign tax. The foreign authorities deduct various amounts from your salary including social security employee contribution. The social security contribution is X% of your gross salary. The social security contribution is compulsory. You can, in theory, claim Y% of the total of your lifetime contributions (or Z% of gross salary per annum) as a lump sum when you are no longer employed in the foreign country. The amount can only be claimed when you leave the foreign country on a final exit visa. The final exit visa requires you to never return to the foreign country under any visa. If you retire and reside in the foreign country you could receive the entire amount as a pension.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6AB | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Detailed Reasoning - Foreign Tax Offset: Section 6AB of the Income Tax Assessment Act 1936 defines both the foreign income and the foreign taxes in respect of which a foreign tax credit may be claimed under section 160AF of the ITAA 1936. The definition of foreign tax includes income tax imposed by a law of a foreign country. Taxation Ruling IT 2507 Income tax: foreign tax credit system foreign taxes eligible for credit against Australian income tax is relevant. Paragraph 5 of Taxation Ruling IT 2507 states that a foreign tax credit may be claimed in respect of income tax and corporation tax including any withholding tax, prepayment or advance payment with respect to the aforesaid taxes imposed. The social security charges deducted from your salary in the foreign country are not considered as income taxes or corporation taxes. Therefore you are not entitled to claim a foreign tax credit in your Australian tax return for these charges. | Detailed Reasoning - Deductible expense: For an expense you have incurred to be deductible you must satisfy the conditions of section 8-1 of the Income Tax Assessment Act 1997 . This provision of the Act allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. As the social security employee payment is not incurred in gaining or producing an assessable income it is not a deductible expense.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.