In a recent court decision, it was found that disposal of a CGT asset held by an Australian Resident Shareholder was not entitled to the full foreign income tax credit. In practical terms:
Let’s assume an individual Australian tax payer owns foreign US shares. The shares were purchased on 1 July 2016 and disposed on 1 July 2019. For simplicity, we will treat the cost base of the shares as $A1,000 and proceeds were $A11,000.
Since the proceeds of the sale are subject to foreign resident withholding tax, 15% of the proceeds were withheld to the US treasury or $1,650. This would generally be a credit in the taxpayer’s 2020 individual income tax return.
However, since the taxpayer held the shares for greater than 12 months, the taxpayer is entitled to the discount method of calculating the capital gain.
So the capital gain is determined as follows:
Proceeds 11,000 (grossed up for the foreign tax withheld)
Less cost <1,000>
Capital Gain 10,000
Less 50% Discount <5,000>
Net capital gain 5,000
Since only 50% of the gain is assessable for tax purposes, the Court decision means that the taxpayer is only entitled to a foreign income tax offset of $825, being half the foreign tax withheld. The other $825 of foreign tax paid is forgone or lost. While this decision was based on assets held in the USA, we believe it is likely to be on all foreign assets in future. Consideration needs to be given to this if you hold or intend to hold foreign assets.
This article appeared in our October 2019 newsletter and the author was Peter Gill.
