When is a taxpayer entitled to claim a FITO？
Burton’s case was essentially concerned with whether a taxpayer suffered double tax when he was allowed only a partial FITO for tax paid in the USA on the whole of a capital gain that was only partly assessable in Australia. Relevantly, S.770-5 states the object of the FITO provisions is:
“…to relieve double taxation where:
- you have paid foreign income tax on amounts included in your assessable income; and
- you would, apart from this Division, pay Australian income tax on the same amounts.”
FITO is the mechanism by which Australia provides relief from double taxation of the same amounts. A taxpayer’s entitlement to a FITO arises under S.770-10(1), which states as follows:
“You are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year
If the foreign income tax has been paid on an amount that is part non- assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2))”….
The definition of a ‘foreign income tax’ for these purposes is broadly designed to cover a tax imposed by a foreign law that is substantially equivalent to Australian income tax. That is, it must be a tax on income, or profits or gains (whether of an income or capital nature), or any other tax that is covered by a double tax agreement. Refer to S.770-15(1) and to the ATO’s document, ‘Guide to foreign income tax offset rules’, which contains a list of foreign taxes eligible for FITO.