In the case of Burton v FCT [2018] FCA 1857, the taxpayer appealed against the Commissioner's decision to partially deny their Foreign Income Tax Offset (FITO) claims for 2011 and 2012. The dispute arose because the taxpayer believed that not allowing them to include the full amount of US tax paid on their capital gains led to double taxation.

The Commissioner argued that double taxation only occurs when a taxpayer pays both foreign tax and Australian tax on the same amount. Since the part of the capital gains not included in assessable income (due to capital losses and CGT discount) wasn't taxed in Australia, it couldn't be doubly taxed.

The main question for the Court was whether the taxpayer had paid US tax "in respect of" an amount included in their assessable income, as per section 770-10(1). The taxpayer argued that since the capital gains were part of their assessable 'net capital gain', the full US tax paid should count towards their FITO claims to avoid double taxation.

Recent Case Sheds Light on Risks of FITO Claim for Capital Gains – Burton’s Case

In Burton’s case, the Full Federal Court examined whether an Australian resident taxpayer could include the entire US tax paid on capital gains from the sale of US investments in their FITO claim. This was despite only a portion of the capital gains being taxable in Australia due to capital losses and the CGT general discount.

Here's a brief overview of Burton’s case:

During the 2011- and 2012-income years, Mr. Burton, an Australian resident for tax purposes, earned capital gains from three investments held in the US by his Australian discretionary trust. Mr. Burton paid US tax on the entire capital gains, at concessional rates for long-term investments (15%) and ordinary tax rates (35%) for others. In Australia, only half of the capital gains (after accounting for capital losses) were taxable at Mr. Burton’s full marginal tax rate due to the CGT general discount. Mr. Burton claimed a FITO, including all US taxes paid, as a credit against his Australian tax.

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