Claiming foreign income tax offsets in respect of capital gains
Under Australia’s income tax system, a resident taxpayer is generally assessable on their worldwide income. However, if a taxpayer has paid foreign income tax on an amount that is also assessable in Australia, they may be entitled to relief from double taxation under Division 770 of the ITAA 1997, in the form of a non-refundable Foreign Income Tax Offset (‘FITO’).
In this regard, if the income in question is a foreign capital gain, it should be noted that recent developments have highlighted issues about how a FITO is calculated in the following situations:
- Where a foreign-sourced capital gain is only partly assessable in Australia – This issue was recently considered by the Full Federal Court in Burton v FCT [2019] FCAFC 141 (‘Burton’s case’). In this case, tax was paid in the USA on the full amount of capital gains that were only 50% assessable in Australia due to the application of the CGT general discount.
- Where there are untaxed foreign capital gains – A taxpayer’s FITO entitlement may be subject to a limit (i.e., a cap). When calculating the FITO limit, certain foreign income is excluded and may result in a higher offset claim. In this regard, the ATO recently issued a draft taxation determination, TD 2019/D10, which sets out the Commissioner’s preliminary view that untaxed foreign capital gains are not excluded when calculating the FITO limit.
The following discussion considers these issues, and the practical impact on FITO claims relating to foreign capital gains. All legislative references are to the ITAA 1997, unless stated otherwise.