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Week 10 Chapter 33

Question 3 Explain the role and key features of the FITO.

The foreign income tax offset (FITO) regime is designed to prevent double taxation by providing resident and non-resident taxpayers with credits for payments of foreign tax on their foreign income that is assessable in Australia. The FITO regime is contained in Div 770 ITAA97. It applies to foreign income tax (defined in s 770-15 ITAA97) paid by Australian and foreign residents on amounts that are included in their assessable income in Australia. It also applies to foreign income tax paid on amounts that are non-assessable non-exempt income under s 23AI or 23AK ITAA36 (s 770-10 ITAA97). Normally, the tax must be paid by the entity claiming the tax offset. The type of tax that is eligible for the offset is foreign income tax that is substantially equivalent to Australian income tax, but the offset does not apply to certain residence-based tax, credit absorption taxes or unitary taxes. The amount of the FITO generally equals the foreign income tax paid (s 770-70 ITAA97). However, it operates subject to an ‘offset limit’ (s 770-75 ITAA97). The offset limit is essentially the greater of: • $1,000, and • the amount of Australian income tax payable by the taxpayer less the amount of Australian income tax that would have been payable if the following assumptions were made: – that the taxpayer’s assessable income does not include: (i) assessable income in respect of which foreign tax was paid, and (ii) other amounts of ordinary or statutory income from a foreign source, and – that the taxpayer is not entitled to: (i) debt deductions attributable to an overseas permanent establishment, or (ii) other deductions that are reasonably related to

assessable income in respect of which foreign tax is paid or are reasonably related to other amounts of ordinary or statutory income from a foreign source (s 770-75 ITAA97). In broad terms, the offset limit is designed to ensure that the amount of the FITO does not generally exceed the amount of Australian tax that would have otherwise been payable on the foreign income.

QUESTION 5 Ted is a resident who owns shares in a foreign company. Each year, the foreign company pays Ted dividends that are subjected to 15% foreign withholding tax. In the current year, Ted received a net amount of $8,500 in dividends from the company. Explain how such dividends are taxed in Australia. The dividend income is assessable to tax in Australia as Ted is a resident (s 6-5 ITAA97). Because Ted has already paid (foreign) tax on this dividend income, he is entitled to a foreign income tax offset to avoid double taxation (s 770-10 ITAA97). In substance, Ted’s entitlement to a FITO is equal to the amount of foreign tax paid capped at the offset limit. This limit is the greater of a) $1,000; and b) the tax that Ted is liable to pay less the tax that he would have paid if the assumptions in s 770-75(4) ITAA97 are made. As Ted’s other income (and therefore tax rate) is unknown, the limit cannot be determined. In the first instance, the $8,500 dividends received is grossed up to get the total assessable income or $10,000 ($8,500/0.85). To this is applied the applicable Australian rate of tax (which will depend on Ted’s other income) and then a credit is allowed for the foreign tax paid up to the offset limit.

QUESTION 12 Discuss the exemptions are available to foreign government

consular

representatives who work in Australia.

Section 768-100 ITAA97 treats as exempt income the official salary and the ordinary and statutory income from a source outside Australia of: • foreign government representatives and their official staff who are neither Australian citizens nor ordinarily resident in Australia, and • officers of the government of a Commonwealth of Nations country who are temporarily in Australia to render services on behalf of that country, or an Australian Government agency. The exemption only applies to foreign government representatives and their official staff if the foreign country grants a similar exemption in relation to Australian representatives and neither the Vienna Convention on Diplomatic Relations nor the Vienna Convention on Consular Relations applies. Where these conventions apply, the person’s income may be exempt under the Diplomatic Privileges and Immunities Act 1967 or the Consular Privileges and Immunities Act 1972. The exemption only applies to officers of the government of a Commonwealth of Nations country if the country exempts Australian Government officers from income tax on their salaries under a similar arrangement

Chapter 34 QUESTION 2 What types of things are covered in the DTA articles? To the extent that there is any inconsistency between the DTAs and domestic tax rules, the provisions in the DTAs generally prevail over any conflicting provisions in the ITAA36 or ITAA97. An important exception to this rule is that the DTAs do not limit the operation of the general anti-avoidance provisions in Part IVA ITAA36 or s 67 FBTAA (s 4(2), s 4AA(2) International Tax Agreements Act 1953; s 177B ITAA36)....