Australia Denies Full Foreign Tax Credit for United States Capital Gains

Australia’s Federal Court has upheld an earlier court determination that an Australian resident who paid U.S. capital gains tax on gains in the U.S. may only claim an Australian foreign tax credit for half the U.S. tax paid.

Unlike the U.S., which taxes capital gains at a preferential rate, Australia subjects them to tax at regular rates but exempts 50% of the gain from tax.  In Burton v. Commissioner of Taxation, http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCAFC//2019/141.html, the court faced a situation in which an Australian resident had paid $5.26 million in U.S. capital gains tax, and sought an Australian foreign tax credit for that amount under the U.S/Australia tax treaty.  However, the Australian Taxation Office denied the full credit, arguing that since only half the gain was taxable in Australia, only half the U.S. tax should be credited. 

The court held that, notwithstanding the treaty, under Australian tax rules the taxpayer was only entitled to a credit for the tax paid on the half of the gain that was taxable in Australia. 

The case is subject to further appeal, but if upheld would be very significant for Australian taxpayers, and perhaps for those in other countries whose treatment of capital gains is similar. 

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How This Will Impact Mobility

Expatriate workers who are residents of Australia may be impacted if they derive capital gains income from the U.S.

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