ATO’s position on foreign income tax offsets confirmed

Accounting & Bookkeeping | For Individuals | Tax
March 5, 2020

The Australian Taxation Office (ATO) has recently welcomed the decision of the High Court to decide against granting an application for special leave, to appeal a decision of the Full Federal Court (FITO). The Full Federal Court had found in favour of the ATO in relation to foreign income tax offsets.

What does this mean? As you may already know, if you have assessable income from overseas, you must still declare it in your Australian income tax return. In the same way, if you’ve paid foreign tax to another country, you may be entitled to an Australian foreign income tax offset (i.e. rebate), which in effect, stops you from being subjected to double-barreled taxes for the same, income/earnings.  However, where this income is subject to capital gains tax in Australia, the Court has determined that you may only be entitled to a credit for half of the tax paid overseas.

Summary of appeal and decision

In simplified terms, this hearing was brought about by an Australian tax resident who owned long term investments in the US. The taxpayer sold the investments and was subject to tax in the US.  He then included 50% of the gain in his Australian tax return, after applying the 50% capital gains tax discount.

Where things become more complex, is the fact that the taxpayer included the entirety of the US tax paid as a FITO. The ATO took the position that only a proportion of the US tax paid (i.e. 50%, as related to the capital gain included in his Australian assessable income), should be allowed as a tax offset.

As noted, the Full Federal Court declared support for this decision.

“This decision reminds taxpayers that they can only claim the foreign income tax offset to the extent that the capital gain is assessable in Australia, rather than the full amount assessed in a foreign jurisdiction,” Deputy Commissioner of the ATO, Tim Dyce said.

“We believe that others may have similarly incorrectly claimed the foreign income tax offset. Now is the time to review any claim and make any necessary voluntary amendments as we intend to commence compliance activity on this issue in the near future.”

More on foreign income tax offsets

While this was likely a disappointing outcome for the involved taxpayer, the decision provides further clarification of relevant law surrounding foreign income tax offsets.

Here are a few quick, additional pointers to keep in mind, as clarified by the ATO:

  • You can claim a foreign income tax offset if you have paid tax on income, profits or gains (including capital gains), that are included in your Australian assessable income.
  • Differences between the Australian and foreign tax systems may lead to your paying foreign income tax in a different income year, from that in which the income or gain is included in your income for Australian income tax purposes. You might have paid the foreign tax in an earlier or later income year. However, the offset can only be claimed after the foreign tax is actually paid.
  • If you paid foreign income tax after the year in which the related income or gains have been included in your Australian tax return, you can claim the offset by requesting an amended assessment for that year. You have up to four years to request an amendment to your assessment from the date you paid the foreign income tax.

If you wish to read more about the full Federal Court decision, you can do so here.

If you are concerned that there may be a discrepancy in your personal FITO claims and/or would like to learn more about foreign income tax offsets, reach out to the Nexis team. We are here to answer relevant queries and support you in any way that we can.

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