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Taxpayer appeals Federal Court decision denying FITOs

Taxpayer appeals Federal Court decision denying FITOs

Richard Wilkins explores the significance of the Federal Court's decision in Burton v Commissioner of Taxation [2018] FCA 1857.


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The recent decision in Burton v Commissioner of Taxation [2018] FCA 1857 has seen the Federal Court find in favour of the ATO when interpreting the foreign income tax offset (FITO) provisions as they relate to capital gains. What is the significance of the decision and what could the appeal look at?

What happened?

The taxpayer, an Australian resident individual, realised a number of capital gains from the sale of investments in the USA and these were subject to US capital gains tax (CGT) (generally at the rate of 15 percent). For Australian tax purposes, as the investments were held on capital account by an individual for greater than 12 months, he was entitled to the general 50 percent CGT discount.

What was the issue?

The issue was how foreign income tax offsets (FITOs) are calculated when income consists of a capital gain subject to a CGT discount.

Subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) (set out below) states the following:

“(1) You are entitled to a * tax offset for an income year for * foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.”

The fundamental question is how this is to be interpreted.

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