What are the implications of Burton’s case?
Unsurprisingly, the ATO welcomed news of the High Court’s refusal of the taxpayer’s application for special leave to appeal against the Full Court decision, stating that “this decision reminds taxpayers that they can only claim the foreign income tax offset to the extent that the capital gain is assessable in Australia, rather than the full amount assessed in a foreign jurisdiction”.
TAX WARNING – ATO to review FITO claims
The ATO has advised that other taxpayers who have similarly incorrectly claimed a FITO (i.e., by claiming the full foreign tax paid on capital gains that are only partly assessable) should review their claims and make any necessary voluntary amendments. Tax agents should identify and assist affected clients, as the ATO has put such taxpayers on notice that “we intend to commence compliance activity on this issue in the near future”. Refer to the media release, ‘Court confirms ATO position on foreign income tax offsets’, dated 14 February 2020.
The decision in Burton’s case provides a timely reminder that FITO is a non-refundable offset, which means that any excess foreign tax paid is permanently lost. That is, it is not refundable, and cannot be carried forward to offset tax on foreign income derived in a later income year.
The case also highlights that the dangers of claiming a FITO in respect of foreign capital gains are not limited to situations where the CGT general discount is available, but also includes where such gains are only partly assessable due to the application of capital losses. Relevantly, S.102-5 (which provides the method statement for calculating a net capital gain) allows a taxpayer to apply capital losses against capital gains in any order they choose. Therefore, where possible, a taxpayer should apply capital losses in a manner that maximises their FITO claim.