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The ATO has put taxpayers with foreign capital gains on notice in the wake of the High Court’s special leave decision.
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ATO eyes foreign tax credits in compliance crackdown
17 February 2020
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Tax advisers and their clients who have claimed the foreign income tax offset (FITO) have been urged to review historical claims following the court’s affirmation of the ATO’s interpretation of the FITO provisions.
Late last week, the High Court refused a taxpayer’s application for special leave to appeal the Full Federal Court’s decision in Burton v Commissioner of Taxation [2019] FCAFC 141.
The Full Federal Court had earlier ruled in favour of the commissioner’s calculation of the FITO on an Australia tax resident’s capital gains in the United States.
The Australian tax resident, Craig Burton, had derived capital gains from investments in the US, and had claimed the whole of the US tax paid as a credit against his Australian income tax in his Australian tax return.
The entire gain was subject to tax in the US, with a 15 per cent concessional rate applying, while in Australia, Mr Burton was subject to tax on half of the gain due to the 50 per cent CGT discount.
In determining the FITO available, the ATO only allowed 50 per cent of the US tax paid because only 50 per cent of the net capital gain was included in Mr Burton’s Australian assessable income.
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Mr Burton had objected to this view, arguing that he ought to have been allowed a tax offset for the full amount of the US tax which he had paid.
With the High Court affirming the Full Federal Court’s decision, the ATO has now warned tax advisers and their clients that it will soon commence a crackdown on the incorrect application of the FITO.
“The decision is an important clarification of the law, and I encourage taxpayers and their advisers to review any prior FITO claims to ensure that the correct apportionment approach has been taken,” ATO deputy commissioner Tim Dyce said.
“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.
“We believe that others may have similarly incorrectly claimed the foreign income tax offset. Now is the time to review any claim and make any necessary voluntary amendments, as we intend to commence compliance activity on this issue in the near future.”
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