LAW ASSIGNMENT

Law Assignment 2



Law Assignment 2

Pete Case Study 1)

The Tax Office has released a guide helping taxpayers understand the rules of foreign income tax offset for the 2008-09 income year. Under the current rules, taxpayers must declare assessable income from overseas in their Australian income tax return. However, taxpayers that have paid foreign tax in another country may be entitled to an Australian foreign income tax offset to avoid the double taxation. This will be of particular relevance to those taxpayers previously exempt under s23AG (Aquinas, 1969, pp.12).

The former rules of quarantining of foreign losses according to particular classes of foreign assessable income have been repealed. There are also transitional rules that permit certain pre-existing foreign losses of a taxpayer to be converted into an ordinary tax loss and deducted against a taxpayer's assessable income.

The current foreign income tax system was legislated under the Tax Laws Amendment (2007 Measures No. 4) Act 2007, and replaces the former foreign tax credit rules in Divisions 18, 18A and 19 of the ITAA 1936. Generally, the foreign income tax offset rules start applying from 1 July 2008 (except taxpayers with substituted accounting periods that have early balancing dates) (Austin, 2002, pp.147). Eligibility of the Foreign Income Tax Offset

In order to be eligible for a foreign income tax offset, a taxpayer must have actually paid an amount of foreign income tax. Moreover, the income on which the taxpayer paid foreign income tax must be included in the taxpayer's assessable income for Australian income tax purposes.

Calculating the Foreign Income Tax Offset

Generally, to claim a foreign income tax offset of up to $1,000, taxpayers only need to record the actual amount of foreign income tax paid on their assessable income. However, to claim a foreign income tax offset of more than $1,000, taxpayers have to calculate their foreign income tax offset limit which may reduced the tax offset to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year. Foreign income tax offset is a non-refundable tax offset (Bentham, 1948, pp.114). The unused tax offset is not refundable and cannot be carried forward to later income years.

Transitional rules

According to the Tax Office guide, taxpayers with unused excess foreign tax credits belonging to any class of foreign assessable income from the previous five income years can convert these amounts to one bundle of pre-commencement excess foreign income tax for each of those five years subject to the following limits:

for company taxpayers, excess foreign tax credits in the 'other income' class cannot be converted where they relate to amounts that would be non-assessable non-exempt income if derived in the commencement year

offshore banking units - existing excess foreign tax credits in the 'offshore banking income' class are converted by multiplying them by the offshore banking eligible fraction (currently one-third). The taxpayers are required to keep written evidence to support their claims for the ...