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09 Sep 11 Update on submission to the ATO regarding FITO and Medicare levy interaction

Earlier this year, The Tax Institute along with other Professional Bodies met with the ATO to discuss the interaction of the Medicare levy and foreign income tax offset (FITO) provisions. The meeting arose because the ATO had been assessing the income tax returns of Australians who are working overseas temporarily, and paying foreign taxes, on the basis that a FITO cannot be applied to reduce the taxpayer’s Medicare levy liability. This has led to situations where Australians that are working in some, countries such as Papua New Guinea, have incurred foreign tax that is greater than the individual’s Australian tax, and are allowed a credit for the foreign tax but cannot obtain a credit against their Australian Medicare levy income. The Tax Institute made a joint submission expressing the view that the ATO’s interpretation of the provisions was incorrect.

The ATO has recently responded to our submission. The ATO has confirmed that they are agree that where an Australian resident is working temporarily in Papua New Guinea and pays an amount of income tax in Papua New Guinea, they are entitled to a credit against their Australian income tax for which the present purposes includes Medicare levy liability. The ATO has confirmed that this outcome occurs under Article 23 of the PNG treaty. The ATO is yet to complete a review of other double tax agreements to see if the same treatment arises.

The ATO has undertaken to review decisions that are contrary to their decided view. They have invited taxpayers/agents who wish to seek a review to contact them. Members who will be pursing this option should contact us, as we can give further information on the process.  We are also seeking clarification from the ATO as to how they intend to publish their view (e.g. possibly by way of ATO ID).

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