Edited version of private advice

Authorisation Number: 1051790373095

Date of advice: 7 January 2021

Ruling

Subject: Foreign income

Question 1

Are you entitled to a Foreign Income Tax Offset (FITO) for the Health Insurance Premium Tax and Medicare Levy Tax deducted from the gross salary paid in Country Y?

Answer

No.

Question 2

Are you entitled to a deduction for the Employment Insurance Premium?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You work for a Country Y employer.

You also do work for an Australian employer.

You have the following amounts deducted from your salary in Country Y:

•         Health Insurance Premium Tax

•         Medicare Levy Tax

•         Employment Insurance Premium.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 770-15

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that Australian residents are assessable on ordinary income derived directly or indirectly from all sources, whether in or out of Australia.

Salary and wages are ordinary income under subsection 6-5(2) of the ITAA 1997. As an Australian resident, the taxpayer's world-wide employment income is assessable in Australia under section 6-5 (2) of the ITAA 1997.

A taxpayer whose assessable income in Australia is also subject to foreign income tax and who has, or is deemed to have, paid the foreign income tax in the income year may be entitled to a foreign income tax offset (FITO) in Australia.

The concept of 'foreign income tax' is intended to cover foreign taxes imposed on a basis that is substantially equivalent to income tax imposed under Australian law. 'Foreign income tax' is defined in section 770-15 of the ITAA 1997 as a tax imposed by a law other than an Australian law that is:

•         tax on income; or

•         tax on profits or gains, whether of an income or capital nature; or

•         Any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

The concept of 'foreign income tax' is intended to cover foreign taxes imposed on a basis that is substantially equivalent to income tax imposed under Australian law.

The Country Y Agreement is a relevant agreement under the International Tax Agreements Act 1953.

In interpreting the wording of a tax treaty, the Commissioner accepts in TR 2001/13 that it is appropriate to have reference to the OECD Model Commentary.

The OECD Commentary on Article X provides that:

•         'It is immaterial on behalf of which authorities such taxes are imposed; it may be the State itself or its political subdivisions or local authorities (constitutes States, regions, provinces, department, cantons, districts...municipalities or groups of municipalities, etc.)'

•         'Social security charges or any other charges paid where there is a direct connection between the levy and the individual benefits to be received' shall be excluded from the list of taxes covered by the Convention.

Therefore, in considering whether an amount deducted from your salary is a 'foreign income tax', it is necessary to consider the basis on which the amount is deducted and any future benefit you might derive in respect of the amount. Substantial, not exact, equivalence to Australian income tax is required.

An amount withheld from the taxpayer's salary may not be foreign income tax but may be incurred by the taxpayer in gaining or producing the assessable salary income. To determine if a withheld amount is deductible for the purpose of determining Australian taxable income, the ordinary tests of deductibility apply.

Health Insurance and Medicare Levy

Employees are generally required to join Employees' Health Insurance and Medicare Levy Tax, together referred to as 'social insurance'.

The Health Insurance Premium Tax is paid by every worker and applies to workers over the age of X. The Medicare Levy tax applies to all workers under the age of X. It covers all medical care costs and pays various benefits for insured persons and their dependants in the event of sickness or injury and time off from work made necessary by sickness or injury or childbirth or death.

Where a person makes a compulsory contribution to a levy (or a social insurance scheme as is the case here) which will be used to provide benefits to that person in the future, that contribution is more akin to a payment for a benefit rather than a tax.

However, it is recognised that an element of Australian income tax is Medicare Levy.

Medicare gives Australian residents access to a range of medical services, lower cost prescriptions and free care as a public patient in a public hospital. It is partly funded by taxpayers who pay a Medicare levy of 2% of their taxable income.

However, all Australian residents are eligible for Medicare benefits regardless of whether they pay the levy or not. Also, the level of benefits Australian residents are entitled to has no bearing on the amount of Medicare levy they pay.

It is considered that Employees' Health Insurance is more akin to private health insurance in Australia, both in relation to the quantum of the premiums and benefits provided under the scheme. 'Health Insurance' is not substantially equivalent to a tax on income such as the Medicare levy.

Therefore, Health Insurance Premium Tax and the Medicare Levy Tax are not considered to be a 'foreign income tax' paid when working out the taxpayer's entitlement to a FITO. Therefore, a FITO is not available.

Employment Insurance Premiums

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Generally, all employers in Country Y are required to enrol their employees in the Employment Insurance scheme.

The insurance pays a benefit for a predetermined period when the worker leaves their job. The benefits are paid taking into consideration why the worker left the job and for how long they have been covered by the insurance.

To receive employment insurance, employees must pay insurance premiums which are set at a percentage of their total wage. The premium is shared between the employer and employee.

'Employment insurance' contributions appear to be similar in effect to income protection insurance in Australia, though compulsory. Premiums for income protection insurance which provides periodic benefits are deductible under section 8-1 of the ITAA 1997.

It is accepted that, as the 'Employment insurance' contributions are analogous to income protection insurance premiums, they are deductible from assessable income to the extent that they may provide the taxpayer with future periodic (that is, not lump sum) benefits.

Therefore, the Employment Insurance Premiums are deductible under section 8-1 of the ITAA 1997.

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