Taxpayer appeals to the Federal Court
The matter of Burton v FCT [2018] FCA 1857 was an appeal by the taxpayer against the Commissioner’s objection decision in relation to amended assessments partially denying his FITO claims in 2011 and 2012. Broadly, the taxpayer argued that by not allowing him to include the full amount of US tax paid on the whole of the capital gains (i.e., including the tax paid on the part that was not taxed in Australia), this effectively gave rise to double taxation of the same amount.
In contrast, the Commissioner argued that double taxation occurs where a taxpayer pays both foreign tax and Australian tax on the same amount. On this basis, an amount that is not included in assessable income (namely, the part of the capital gains attributable to the application of the capital losses and the CGT general discount) cannot, by definition, be doubly taxed.
The main issue for consideration by the Court was whether, in the language of S.770-10(1), the taxpayer had paid the US tax “in respect of” an amount that was all or part of an amount “included in” his assessable income. This turned on the proper construction of S.770-10. The following example illustrates the different approach of the parties to claiming a FITO.
The taxpayer’s primary submission on the proper construction of S.770-10(1) was that the full amount of the capital gains in question had been “included in” his assessable income for the relevant income years as they were part of the calculation of the assessable ‘net capital gain’. In this regard, he noted that both countries taxed long-term capital gains similarly, but using different methods (i.e., the USA taxed the entire capital gain at a concessional rate, and Australia only taxed half the gain at the full rate) and he argued that “the difference in mechanics is no reason to allow double taxation to go unrelieved”. It was on this basis, the taxpayer argued, that the full amount of US tax paid on the capital gains should count towards his FITO claims, to avoid double taxation.