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Australia Publishes Final Taxation Determination on Including Capital Gains when Calculating Foreign Income Tax Offset Limit — Orbitax Tax News & Alerts

The Australian Taxation Office (ATO) has announced the publication of Taxation Determination (TD) 2020/7 Income tax: can capital gains be included under subparagraph 770-75(4)(a)(ii) of the Income Tax Assessment Act 1997 in calculating the foreign income tax offset limit?

TD 2020/7 is in response to some taxpayers incorrectly including foreign capital gains where no foreign tax has been paid as ‘disregarded income’ in their calculation of the foreign income tax offset (FITO) limit and therefore over-claiming FITO.

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Ruling

Capital gains are not included under subparagraph 770-75(4)(a)(ii) of the Income Tax Assessment Act 1997 when calculating the foreign income tax offset (FITO) limit.

Example

In an income year, an Australian taxpayer (the taxpayer) disposed of a number of CGT assets and recognised the following CGT events (assume all capital assets have been held for less than 12 months):

  • a foreign capital gain of $3,000 in respect of which $630 of foreign income tax was paid
  • a foreign capital gain of $20,000, in respect of which no foreign income tax was paid
  • an Australian capital gain of $10,000, and
  • a capital loss of $15,000.

In determining their net capital gain, the taxpayer applies the $15,000 capital loss against the $10,000 Australian capital gain and $5,000 of their foreign capital gain in respect of which no foreign income tax was paid.

The resulting net capital gain is $18,000 which includes $15,000 of foreign capital gain in respect of which no foreign tax was paid and a $3,000 foreign capital gain in respect of which foreign income tax was paid. This net capital gain does not have a source.

The entire $3000 foreign capital gain in respect of which foreign income tax was paid has been included in the taxpayer's assessable income. That $3,000 foreign capital gain will be disregarded under subparagraph 770-75(4)(a)(i) for purposes of the FITO limit calculation in section 770-75.

The foreign capital gain amount of $15,000 in respect of which no foreign income tax was paid that was not absorbed by the capital loss cannot be included under subparagraph 770-75(4)(a)(ii) for purposes of the FITO limit calculation in section 770-75, as it is neither an amount of ordinary income nor an amount of statutory income.

Date of effect

This Determination applies both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10 Public Rulings).

It is appropriate to apply the view in this Determination retrospectively as the view has been consistently applied by the Commissioner since the commencement of the relevant provision. The Commissioner has not previously issued any publications or demonstrated any conduct that could reasonably be seen as conveying a different view of the law. The view expressed in this Determination is also reflected in generally accepted industry practice.