A 22 August 2019 judgment of Australia's full Federal Court has been published regarding whether a full foreign tax credit may be claimed in respect of income only partially taxable in Australia. The case involved an Australian trustee of an Australian discretionary trust that held rights to interests in U.S. oil and gas wells. During the years 2010 to 2012, these rights were sold off, and because they were considered U.S. real property interests, the gains were treated as effectively connected income and subject to U.S. tax at a rate of 15%. In Australia, gains on such rights are also subject to tax but with a 50% capital gains tax discount. While the trustee attempted to claim a full credit for the U.S. tax paid, the Australian Taxation Office (ATO) determined that because only 50% of the gain was taxable, only 50% of the foreign tax paid could be claimed as a credit, which was appealed.
In its decision, the full Federal Court upheld an earlier decision of a single Federal Court justice which had sided with the ATO. In the decision, the Court looked at whether a full credit could be claimed under the provision of both domestic law and Article 22 (Relief from Double Taxation) of the 1982 Australia-U.S. tax treaty. With regard to domestic law, all three justices found that because only 50% of the gains are taxable income in Australia, only a 50% credit for foreign tax paid is allowed. With regard to the provisions of the Australia-U.S. treaty, two of the three justices found that only 50% of the U.S. tax may be credited, while one justice found that a credit for the full amount of U.S. tax should be allowed under the treaty. Given the majority opinion, the earlier decision and position of the ATO is upheld and the appeal is dismissed.