Issue
Will the Commissioner exercise the discretion in subsection 160AK(1) of the Income Tax Assessment Act 1936 (ITAA 1936), to amend a determination to allow a greater foreign tax credit than what would be allowable under section 160AF of the ITAA 1936, if the taxpayer is a life insurance company?
Decision
No. In exercising the discretion in subsection 160AK(1) of the ITAA 1936 to amend the foreign tax credit determination, the Commissioner will apply section 160AF of the ITAA 1936 to ascertain the amount of the credit.
Facts
A life insurance company has a taxable income of $12,000,000. The company's ordinary class of taxable income is $4,000,000 and its complying superannuation class of taxable income is $8,000,000.
The company's ordinary class of taxable income includes foreign income of $2,000,000. Foreign tax of $500,000 was paid in respect of the foreign income.
The ordinary class of taxable income, including the foreign income, is taxed at 30% and the complying superannuation class of income is taxed at 15%. The 'average rate of Australian tax' under subsection 160AF(8) of the ITAA 1936 is 20%.
The 'Australian tax payable' on the foreign income under subsection 160AF(3) of the ITAA 1936 is $400,000, being the average rate of Australian tax of 20% applied to the foreign income.
A determination was made by the Commissioner under section 160AJA of the ITAA 1936 that the foreign tax credit of $400,000 was allowable in respect of the foreign tax paid on the foreign income.
The company requested that the Commissioner exercise the discretion in subsection 160AK(1) of the ITAA 1936 and amend the foreign tax credit determination to increase the credit from $400,000 to $500,000.
Reasons for Decision
Subsection 160AF(1) of the ITAA 1936 provides that a taxpayer is entitled to a foreign tax credit where the assessable income of a resident taxpayer includes foreign income and the taxpayer has paid foreign tax for which they are personally liable in respect of that income.
The amount of the credit is the lesser of the foreign tax paid or the Australian tax payable in respect of that foreign income.
The amount of credit that is allowable in respect of foreign tax is calculated under section 160AF of the ITAA 1936. The Commissioner makes a determination under Division 19 of Part III of the ITAA 1936 of the amount that is allowable to the taxpayer.
Section 160AK of the ITAA 1936 allows the Commissioner to amend the foreign tax credit determination to increase or decrease the amount of the credit.
The amount of amended credit that is allowable under an amended determination will be ascertained under section 160AF of the ITAA 1936, taking into account any changed circumstances of the taxpayer. However, the Commissioner will not exercise the discretion in subsection 160AK(1) of the ITAA 1936 to amend a determination to allow a taxpayer a credit for a greater or lesser amount than the amount that is correctly calculated in accordance with section 160AF of the ITAA 1936.
Under subsection 160AF(1) of the ITAA 1936 the amount of foreign tax credit allowed in the income year is the lesser of: • the amount of foreign tax ($500,000); and • the amount of Australian tax payable in respect of the foreign income ($400,000).
The amount of foreign tax credit allowable under section 160AF of the ITAA 1936 is therefore $400,000.