Foreign Tax Credit: tax imposed by Zimbabwe on pension income

Is an Australian resident taxpayer entitled to a foreign tax credit under subsection 160AF(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for Zimbabwean tax imposed on pension income received from Zimbabwe?

Yes. The taxpayer is entitled to a foreign tax credit under subsection 160AF(1) of the ITAA 1936 as the Zimbabwean tax imposed on the pension income is a creditable foreign tax.

The taxpayer is a resident of Australia for taxation purposes who receives a pension from Zimbabwe.

The Zimbabwean government imposes income tax on the taxable income of corporate entities and individuals.

Income tax is deducted from the income of an individual by the employer or pension provider. It is calculated on various bands of income at rates fixed by the Zimbabwean government annually.

Subsection 160AF(1) of the ITAA 1936 provides that a resident taxpayer, whose assessable income includes foreign income on which the taxpayer has personally paid foreign tax, is entitled to a credit against the Australian tax payable of the amount of that foreign tax, up to the amount of Australian tax payable on the foreign income.

Subsection 6AB(2) of the ITAA 1936 defines 'foreign tax' to include tax imposed on income by a law of a foreign country.

The Zimbabwean Government imposes income tax on the taxable income of individuals calculated on various bands of income at rates fixed by the government annually. Zimbabwe also has a 'pay-as-you-go' tax system where tax is deducted from the income of the individual by the employer or pension provider. Further, Zimbabwe comes under 'limited-exemption listed countries' which are considered to have tax systems similar to Australia's.

Zimbabwe tax imposed on income is therefore a 'foreign tax' for the purposes of subsection 6AB(2) of the ITAA 1936.

Accordingly, a foreign tax credit will be allowable to the taxpayer under subsection 160AF(1) of the ITAA 1936 for Zimbabwean tax imposed on the pension income.