Key Reasons Behind the Full Federal Court's Decision
The Full Federal Court's decision rested on several key factors:
Interpretation of S.770-10:
All three judges concurred with the primary judge's interpretation of S.770-10. They emphasized that the section pertains to "an amount that is all or part of an amount included in your assessable income," not to "all or part of an amount that is all or part of an amount included in your assessable income." This distinction was crucial in understanding that only the net capital gain, not the individual capital gains, was "included in" the taxpayer's assessable income.
Calculation of Net Capital Gain:
The Court clarified that S.770-10 included in Foreign Income Tax Offset (FITO) only the amount of US tax paid "in respect of" the net capital gain, not the capital gains individually. The net capital gain is determined by reducing gross capital gains by capital losses and then applying the CGT general discount (50%) for investments held for at least 12 months.
Legislative Notes and Proportionate Approach:
Although legislative notes don't have operative effect, Note 2 to S.770-10 supported the Commissioner's approach of considering the proportionate amount of US tax paid.
Alternative Argument and Dissent:
Regarding the taxpayer's alternative argument, the Court was divided 2:1, with Logan J dissenting. Logan J believed that Article 22(2) of the Double Tax Agreement (DTA) applied to relieve double taxation "in respect of" the entire gains derived from the USA, not just the discounted capital gains as concluded by the primary judge. However, the majority found no inconsistency between Article 22(2) and S.770-10, ultimately rejecting the taxpayer's argument.
Conclusion:
The Court's decision underscores the importance of careful interpretation of tax laws and international agreements. Despite dissent on one aspect, the majority concluded that the taxpayer's claims didn't align with the legal framework. Thus, the decision favored the Commissioner's interpretation.
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