Foreign tax credit: tax paid on pension and rental income earned in New Caledonia

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 New Caledonian tax paid in relation to pension and rental income received from New Caledonia?

Yes. An Australian resident taxpayer is entitled to a foreign tax credit under subsection 160AF(1) of the ITAA 1936 for New Caledonian tax paid in relation to pension and rental income received from New Caledonia.

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

The taxpayer received pension income from New Caledonia.

The taxpayer received rental income from a property in New Caledonia.

The law of New Caledonia provides for the imposition of income tax on pension and rental income derived in New Caledonia.

The taxpayer has paid income tax in New Caledonia in relation to that income.

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 during the income year.

Pension income and rental income is ordinary income for the purposes of section 6-5 of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any double tax agreement 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 the ITAA 1997 so that those Acts are read as one.

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

New Caledonia is an overseas territory of France and therefore the French Agreement may apply.

Taxation Determination TD 93/220 addresses whether the definition of 'France' in the French Agreement and French Protocol includes the overseas French Territories. The TD determined that these territories are not part of France for the purposes of the French Agreement. Therefore the French Agreement does not apply.

Subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of a resident contains foreign sourced 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.

Taxation Ruling IT 2507 contains a non-exhaustive list of foreign taxes creditable against Australian tax. As no New Caledonia taxes are listed, it is necessary to determine whether the foreign tax paid by the taxpayer is creditable.

'Foreign tax' is defined in subsection 6AB(2) of the ITAA 1936 to include income tax imposed by a law of a foreign country. In order to be considered a creditable income tax for the purposes of subsection 160AF(1) of the ITAA 1936, a foreign tax must be directed at the taxpayer's net income or gain.

As the taxpayer is a resident of Australia, the New Caledonia pension and rental income forms part of their assessable income under subsection 6-5(2) of the ITAA 1997. The law of New Caledonia provides for the imposition of income tax on pension and rental income derived from New Caledonia. The taxpayer has paid income tax in New Caledonia in relation to that income.

Therefore a foreign tax credit will be allowed under subsection 160AF(1) of the ITAA 1936. Note: If the New Caledonia tax paid on the pension income and rental income is less than the Australian tax payable, the taxpayer will be entitled to a full credit for the New Caledonia tax paid. Where the New Caledonia tax paid is greater than the Australian tax payable, the taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess New Caledonia tax paid. However, under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any future tax payable on the taxpayer's foreign pension and/or rental income.