Taxation Ruling IT 2437 - Income tax : foreign tax credit system - foreign taxes eligible for credit against australian income tax

What this ruling is about: New Division 18 of the Income Tax Assessment Act (inserted by the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 and first applicable to assessments for the year of income commencing 1 July 1987) provides for the granting of credits in respect of foreign tax. Subsection 160AF(1) provides that a resident taxpayer, whose assessable income includes foreign income on which the taxpayer has paid foreign tax, is entitled to a credit against the Australian tax payable of the amount of that foreign tax, up to the amount of Australian tax payable on the foreign income. 2. Subsection 6AB(2) specifies in general terms the nature of the foreign taxes for which credit is allowable. First, the tax must be imposed by the law of a foreign country, whether it be at national, state, local or other government level (subsection 6AB(6)). Secondly, it must be either : 3. However, the subsection specifically excludes from its ambit a foreign tax that is a unitary tax, as defined in subsection 6AB(6). (A further Ruling concerning unitary taxes is proposed.) 4. The law does not identify specific taxes of particular countries as being either creditable or not creditable; that has been left to be determined by the application of the above criteria on a case by case basis. 5. Essentially, foreign tax must be imposed on a basis substantially equivalent to that on which the Income Tax Assessment Act operates. That is, it must be imposed on the basis of a taxpayer's net income or gains, whether of an income or capital nature, or be a withholding tax on outgoing payments (imposed as a final tax and not be later creditable against the ultimate foreign tax liability of the taxpayer) similar to the Australian withholding tax on the gross amount of outgoing dividends and interest payments. This has been the basis which has been used in the past to measure whether a foreign tax qualifies as a tax that would render an Australian resident recipient of the income upon which it is imposed eligible for the exemption from Australian tax provided by paragraph 23(q) of the Assessment Act. 6. In order to assist taxpayers to more readily understand which foreign taxes are creditable for purposes of the foreign tax credit system a list of creditable foreign taxes is set out in this Ruling. The taxes included in the list will be creditable whether imposed on an assessment basis or by way of a final withholding tax. 7. The list is not exhaustive and will be revised when enquiries in relation to the nature of certain other foreign taxes presently under examination have been finalised and in the light of experience gained in administration of the new provisions. The list will also need to be updated periodically as a consequence of changes in other countries' taxes and as other foreign taxes are admitted as creditable taxes. Future Rulings to be issued on this basis will be in the form of an updated consolidated list of creditable taxes (rather than a series of lists to supplement that set out in this Ruling). It will, however, contain the usual reference to earlier Rulings on the topic. Consideration is to be given to the inclusion in the future Rulings of further points of principle which may clarify the status of particular types of foreign taxes and the development of a list of non-creditable taxes so as to assist taxpayers where the creditability of a particular tax is doubtful. 8. Taxpayers who seek credit for foreign taxes not identified in the following list (or in the subsequent Rulings) should supply details of those taxes in the relevant income tax returns. The details to be provided should include : 9. Return forms for the 1987/88 and subsequent years of income, or accompanying instructions, will also provide information concerning the details to be supplied. Decisions as to whether particular foreign taxes not included in this Ruling (or in subsequent Rulings) are creditable taxes under the foreign tax credit system will be taken in National Office. Branch Offices should therefore refer enquiries received, or claims in returns, in relation to such taxes to National Office for consideration and advice. It would assist with the processing of returns if taxpayers were to supply relevant details to National Office as soon as a liability to pay such a foreign tax becomes apparent.


Ruling: 10. Subject to the provisions of Division 18 of Part III of the Income Tax Assessment Act, a taxpayer will be entitled to a credit against Australian tax payable on foreign income for the following foreign taxes paid in respect of that income : COMMISSIONER OF TAXATION 30 July 1987




Date of effect: Immediate


Legislative references: 6AB(2) 6AB(6) 160AF
Subject references: FOREIGN TAX CREDIT SYSTEM - CREDITABLE FOREIGN TAXES