Foreign Tax Credits - taxes imposed on French rental property

Is the taxpayer entitled to a foreign tax credit under section 160AF of the Income Tax Assessment Act 1936 (ITAA 1936) for the 'contribution droite de bail' and 'contribution additional droite de bail' taxes imposed on French rental properties?

No. The taxpayer is not entitled to a foreign tax credit under section 160AF of the ITAA 1936 for the 'contribution droit de bail' and 'contribution additional droit de bail' taxes as they do not fall within the meaning of foreign tax.

The taxpayer is an Australian resident and holds real property in France from which they derive rental income.

The taxpayer is required to lodge an income tax return in France and pay income tax as assessed on the income from their rental property.

The French taxation system also imposes further taxes on leases. These are known as 'contribution droite de bail' and 'contribution additionnelle droit de bail' . These taxes are imposed on leases which are not subject to 'taxe sur la valeur' , more commonly referred to as 'value added tax'.

These additional imposts are shown separately on the taxpayer's French annual income tax assessment notice.

Under the foreign tax credit system, a resident taxpayer will be allowed a tax credit for foreign tax paid on income from overseas up to the extent of the tax liability on that income under the Australian taxation system.

To qualify for this credit, the taxpayer must have been personally liable for and paid this foreign tax before the credit can be claimed. Furthermore, the foreign tax must be with regard to income which is assessable in Australia.

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Rental income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income it is necessary to consider any applicable double tax agreements contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 11 to the Agreements Act contains the double tax agreement between Australia and France (the French Agreement). The French Agreement operates to avoid double taxation of income received by Australian and French residents.

Article 5 of the French Agreement provides that French taxation authorities have the right to tax any rental income that is derived from a rental property situated in France and paid to an Australian resident. The French Agreement does not exclude the rental income from being taxable in Australia. The rental income may therefore be taxed in both countries and is assessable in Australia as 'ordinary income' under section 6-5 of the ITAA 1997.

Paragraph (1) of Article 23 of the French Agreement provides that, subject to the provisions of the law in Australia, a credit for any tax paid in France will be allowed against Australian tax payable on income from French sources.

Subsection 160AF(1) of ITAA 1936 provides that where the assessable income of a resident taxpayer contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed.

A 'foreign tax' is defined in subsection 6AB(2) of the ITAA 1936 to include tax imposed by a law of a foreign country being income tax, tax upon profits or gains whether of an income or capital nature, tax deemed to have been paid in respect of a dividend or any tax included under the terms of any double tax agreement. In order to be considered an income tax, a foreign tax must be directed at the taxpayer's net income or gain.

'Contribution droite de bail' and 'contribution additionnelle droit de bail' , however, are more akin to the French equivalent of Australian State 'duties'. They are assessed to the owner of the rental property on an annual basis. The 'contribution droite de bail' and 'contribution additionnelle droit de bail' are costs directly incurred by the owner of a French rental property in the course of earning assessable rental income from the property. Like rates, insurance premiums and land tax, they are an ongoing expense of a revenue nature.

Income Tax Ruling IT 2507 contains a list of foreign taxes creditable against Australian tax. The creditable French taxes are income tax and corporation tax.

The 'contribution droit de bail' and 'contribution additional droit de bail' do not fall within the meaning of income tax or corporation tax and accordingly a foreign tax credit under section 160AF of the ITAA 1936 is not allowable.