Foreign Tax Credit: Foreign tax paid on salary and wages of an Australian resident employed in foreign consulate located in Australia

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 foreign tax paid on salary and wages earned when employed in a foreign consulate that is located in Australia?

No. The taxpayer is not entitled to a foreign tax credit under subsection 160AF(1) of the ITAA 1936 for tax paid on salary and wages earned when employed in a foreign consulate that is located in Australia because the salary and wages are not 'foreign income'.

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer is employed in a foreign consulate located in Australia. Their salary and wages are paid by the foreign government.

Foreign tax is withheld from the salary and wages.

There is no double tax treaty between Australia and the foreign country.

Subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of a resident taxpayer contains foreign income and foreign tax has been paid on that income, a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of: • the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax; or • the amount of Australian tax payable in respect of the foreign income.

The term 'foreign income' is defined in subsection 6AB(1) of the ITAA 1936 to mean income derived from sources in a foreign country or countries.

Generally, Australian courts have held that the source of employment income is where the employee performed their duties ( C of T (NSW) v. Cam and Sons Ltd (1936) 36 SR (NSW) 544; (1936) 4 ATD 32 and Federal Commissioner of Taxation v. French (1957) 98 CLR398; (1957) 7 AITR 76; (1957) 11 ATD 288).

Since the salary and wages derived by the taxpayer are from employment at a foreign consulate located in Australia, the income is not considered to be 'foreign income' that has a foreign source.

Accordingly, the taxpayer will not be entitled to a foreign tax credit under subsection 160AF(1) of the ITAA 1936.