Talking Tax – Issue 169

Foreign income tax offsets on exempt income?

The Federal Court of Australia Full Court in the case of Burton v Commissioner of Taxation [2019] FCAFC 141 rejected the taxpayer’s appeal in relation to an earlier Federal Court decision to deny the taxpayer claiming the full foreign Income Tax Offset (FITO) available under section 770-10 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

For our commentary on the first instance decision of the Federal Court see the following link.

The taxpayer in this appeal was an Australian resident who sought to claim the FITO for all income tax paid in the United States on the disposal of certain capital assets held there. The taxpayer qualified for the 50% CGT discount and accordingly, only 50% of the net capital gain was included in their assessable income.

The Commissioner denied the taxpayer’s claim that it was entitled to the FITO for the tax paid in the United States. Instead, the Commissioner determined that the taxpayer was only entitled to the FITO on the 50% of the capital gain that was included in the taxpayer’s assessable income. The taxpayer disagreed and applied to the Federal Court to have the Commissioner’s determination overruled. The Federal Court found in favour of the Commissioner and the taxpayer subsequently appealed to the Full Court.

In dismissing the appeal, Justice  Stewart, with whom Justice Jackson agreed (Justice Logan dissenting), upheld the decision of the trial judge, having regard to the following factors:

    1. The FITO is only available for foreign tax paid on an amount included in the taxpayer’s assessable income and not amounts that are excluded by operation of statute.
    2. The FITO provisions operate to relieve double taxation where ‘you have paid foreign income tax on amounts included in your assessable income.’ It would therefore be inconsistent with the legislation to extend the FITO to the 50% of the capital gain that was not included in the taxpayer’s assessable income.
    3. Note 2 to section 770-10 of the ITAA 1997 provides an example where foreign income tax has been paid on an amount that is partly non-assessable non-exempt income and partly assessable income; the FITO will only be available for the proportion of foreign income tax that was paid on the amount included in the taxpayer’s assessable income. While this example relates to non-assessable non-exempt income, Stewart J held that it was logical that this approach should also apply to exempt income which is excluded from the taxpayer’s assessable income by the 50% CGT discount.
    4. The explanatory memorandum to the Tax Laws Amendment (2007 Measures No.4) Bill 2017 (Cth) to the FITO provisions, states that an entitlement to a tax offset will only arise when, and to the extent that, foreign income tax has been paid on an amount included in assessable income. This indicates that foreign tax paid on an amount excluded from the taxpayer’s assessable income will not contribute to the calculation of the available FITO.

Denying the taxpayer from claiming the FITO on foreign tax paid on the 50% of the capital gain excluded from the taxpayer’s assessable income was also consistent with the Double Taxation Agreement between Australia and the United States.

Confidential - keeping your tax information protected

The Federal Court in the recent case of Binqld Finances Pty Ltd (in Liq) v Israel Discount Bank Ltd [2019] FCA 1186 had to consider the application of the confidentiality provisions on ‘protected information’ in Division 355 of the Tax Administration Act 1953 (Cth) (TAA).

The taxpayers in this case included a range of companies connected to a particular family that were issued with amended assessment totalling (with penalties) approximately $74 million. The amended tax liabilities arose because the ATO disallowed deductions for interest payments made to foreign banks as part of what was considered a tax avoidance scheme.

These companies subsequently went into liquidation and proceedings were commenced against various individuals who had been directors of the companies.

A settlement deed was entered into in for the proceedings. Annexed to the settlement deed was an ATO document which contained details of the income tax and related liabilities of the various taxpayers arising from the amended assessments.

A claimant from a related proceeding subsequently sought access to this settlement deed to investigate whether its rights to compensation had been prejudiced by the agreement. This gave rise to the issue whether the ATO document contained ‘protected information’ within the meaning of section 355-30 of the TAA which, if it was to be disclosed by the taxpayers, would constitute an offence under section 355-155 of the TAA.

Section 355-30 of the TAA defines ‘protected information’ as information that:

  1. was disclosed or obtained for the purpose of a law that was a taxation law when the information was disclosed or obtained;
  2. related to the affairs of an entity; and
  3. identifies or is reasonably capable of being used to identify the entity.

The Court had little trouble concluding that the ATO document contained at least some ‘protected information’ within the meaning of section 355-30 of the TAA as it included details about the assets and liabilities of the various taxpayers that had been disclosed to the ATO for the sole purpose of settlement negotiations relating to the amended assessment and resolution of the dispute connected to the tax avoidance scheme.

Notably, under section 355-205 of the TAA, such ‘protected information’ may be disclosed to the court where it is necessary to do so for the purpose of carrying into effect the provisions of a taxation law. The Court held that, although production of the ‘protected information’ may have been necessary to deliver justice to the party seeking to ascertain whether its interests had been prejudiced, production of the ‘protected information’ was not necessary to give effect to the tax law as the relevant proceeding was one of insolvency and not tax related.

Accordingly, the exception permitting disclosure under section 355-205 of the TAA did not arise and to disclose the ‘protected information’ would constitute an offence under section 355-155 of the TAA. The Court therefore ordered that a redacted version of the ATO document, stripped of all ‘protected information,’ be produced to the Court for the benefit of the party seeking the information.

Luxury car tax: no free rides

On 19 August 2019, Justice Thawley in the case of Stallion (NSW) Pty Ltd v FCT [2019] FCA 1306 rejected the taxpayer’s application to the Federal Court contesting assessments made by the Commissioner which denied the taxpayer from claiming input tax credits (ITCs) and decreasing luxury car tax (LCT) adjustments on the purchase of luxury vehicles.

The company taxpayer claimed that it had purchased 9 luxury cars during the 2016-17 income year and then on-sold them to another entity known as CJS. CJS would then sell these cars to a retail consumer.

The taxpayer paid LCT and GST on the purchase of each car and argued that it was entitled to claim the related decreasing LCT adjustments and ITCs when they were on-sold to CJS.

The Commissioner argued that, although the taxpayer was named as the purchaser in the purchase agreements, it was acting as an agent of CJS and therefore not entitled to the ITC or decreasing LCT adjustments.

Thawley J agreed with the Commissioner and held that the taxpayer was acting as the agent of CJS which was the purchaser of the luxury vehicles. This meant that the taxpayer was not entitled to ITCs or decreasing LCT adjustments.

The following key factors were relied on in reaching this conclusion:

  1. the taxpayer did not take out insurance in relation to its activities;
  2. the decision to negotiate or enter into a purchase agreement was always made by CJS;
  3. there were no price negotiations between CJS and the taxpayer as CJS would simply set the price it was willing to pay and the taxpayer would oblige; and
  4. the lack of evidence which supported the taxpayer’s argument that the funds provided by CJS were loans, lead to the conclusion that the purchase price paid by the taxpayer for the vehicles was ultimately funded by CJS.

This article was written with the assistance of Charlie Renney, Lawyer.


Andrew O’Bryan

Andrew specialises in taxation law. He is a CPA Australia Fellow and Chairman of its Taxation Centre of Excellence.

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