Issue
Is a life insurance company entitled to a credit under subsection 160AF(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for foreign tax paid in respect of the share of its trust income derived from segregated exempt assets?
Decision
No. A life insurance company is not entitled to a credit under subsection 160AF(1) of the ITAA 1936 for foreign tax paid in respect of the share of its trust income derived from segregated exempt assets.
Facts
A life insurance company holds all the units in a unit trust. The units are assets that are held by the company as either: • Virtual PST assets • Ordinary assets or • Segregated exempt assets.
The unit trust derived foreign income in the 2001-02 income year and paid foreign tax in respect of that foreign income.
The life insurance company was presently entitled to all the income of the unit trust.
The life insurance company claimed as a foreign tax credit under subsection 160AF(1) of the ITAA 1936 the total amount of the foreign tax paid by the unit trust on the company's share of trust income including the amount of trust income derived from the segregated exempt assets of the company.
The trust income derived by the life insurance company from its segregated exempt assets is exempt from tax under paragraph 320-35(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997).
Reasons for Decision
Subsection 160AF(1) of the ITAA 1936 provides that a taxpayer is entitled to a foreign tax credit if it satisfies the following requirements: (a) the assessable income of the taxpayer includes foreign income, and (b) the taxpayer has paid foreign tax in respect of the foreign income, being tax for which the taxpayer is personally liable.
The term 'the foreign income' in paragraph 160AF(1)(b) of the ITAA 1936 means the foreign income referred to in paragraph 160AF(1) (a) - which is the foreign income that is included in the assessable income of the taxpayer.
This interpretation is consistent with the context in which the term foreign income is used and it accords with the legislative intent of the provision.
The Explanatory Memorandum to Taxation Laws Amendment (Foreign Tax Credits) Bill 1986 states: the assessable income of a year of income of a resident taxpayer includes foreign income (paragraph 1(a)) and the taxpayer has paid foreign tax in respect of that foreign income (paragraph 1(b)).
Therefore, as the share of the trust income derived by the life insurance company from its segregated exempt assets is not included in the assessable income of the company, a foreign tax credit is not allowed for any foreign tax that has been paid in respect of that income.