Taxpayer appeals to the Federal Court continues
A secondary argument raised by the taxpayer was that the full amount of US tax on each gain was paid “in respect of” the corresponding net capital gain included in his assessable income.
As an alternative argument, the taxpayer submitted that denying him a claim for the full amount of US tax paid was inconsistent with Article 22(2) of the double tax agreement between Australia and the USA (‘the DTA’), which prevails in the event of any inconsistency.
Ultimately, the Federal Court preferred the Commissioner’s approach to S.770-10(1), finding that it accorded with the statutory purpose of avoiding double taxation. It agreed that double taxation is suffered only to the extent that the amount subject to foreign tax is part of assessable income. In this regard, it was held the taxpayer had not suffered double taxation to the extent of 50%.
The Federal Court said “it is irrelevant that US and Australian law may arrive at a similar result by different mechanics. The question is not how the amount of CGT is calculated, but on what assessable income it is calculated. That assessable income under Australian law excludes 50% of the capital gain and excludes certain capital losses.”
The Court also rejected the taxpayer’s alternative argument, finding that nothing in Article 22(2) was inconsistent with the Commissioner’s construction of S.770-10. In the Court’s view, “where Art 22(2) refers to Australian tax payable in respect of income, the income is only 50% of the capital gain.” Further, while the general principle under the Article was that a credit be allowed against Australian tax payable, it did not suggest the credit should be for the whole amount of the US tax paid. Nor did it prescribe the credit allowable; rather this was to be determined in accordance with Division 770.