Determining the FITO limit amount continues
On 11 October 2019, the ATO issued draft TD 2019/D10 which provides the Commissioner’s preliminary view regarding whether a foreign capital gain in respect of which a taxpayer had not paid any foreign income tax would be excluded from a taxpayer’s assessable income under S.770- 75(4)(a) when calculating their FITO limit. In this regard, the ATO’s view is that no amount of an (untaxed) foreign capital gain would be excluded under S.770-75(4)(a)(i), because it is not an amount in respect of which the taxpayer has paid foreign income tax that counts towards FITO.
The ATO considers that an (untaxed) foreign capital gain would also not be excluded under S.770- 75(4)(a)(ii). Noting that this section only applies to amounts that are ‘ordinary income’ or ‘statutory income’ from a ‘source other than an Australian source’, the ATO states that only a net capital gain is an amount of statutory income, and not each individual capital gain. Also, a net capital gain does not have a source as it is a product of capital gains and losses made from Australian and non- Australian sources, the application of unapplied net capital losses and applicable discounts. Section 770-75(4)(a)(ii) does not allow a net capital gain (the singular amount of ‘statutory income’) to be disaggregated to identify capital gains that have been included in working out that amount.
The following example illustrates the practical impact of the ATO’s approach when calculating the FITO limit for an Australian resident taxpayer that derives untaxed foreign capital gains.