Question

3rd Tax Case: Burton v Commissioner of Taxation [2019] FCAFC 141.

In providing your analysis, the following 5 points must be addressed:

1^st The arguments and Facts of the case.

2^nd What the taxpayer said.

3^rd What the main issue is.

4^th What the Commissioner’s argument was.

5^th What the Judges said.

PLEASE I NEED THIS ANSWER WITHIN AN HOUR

Answer 1

On 22 August 2019, Australia's Full Federal Court unanimously decided in Burton v. Commissioner of Taxation [2019] FCAFC 141 that Australian taxpayers, to whom the 50% capital gains tax (CGT) discount applies are only entitled to a foreign income tax offset (FITO) in respect of half of the US tax paid in respect of gain. By majority (Logan J dissenting) it further held that article 22(3) of the Australia-US tax treaty did not operate to alter this result       

The taxpayer, Burton, was an Australian tax resident and in the 2011 and 2012 income years, he was presently entitled to capital gains made by the trustee of a discretionary trust on the disposal of US assets. The entire gain was subject to tax in the US, with a concessional rate (15%) applying.

For Australian tax purposes, the gain also was treated in a concessional manner, but the mechanics of the calculation were different to the US tax rules. Burton was subject to Australian tax on only half of the gain (due to the 50% CGT discount), which was then subject to Australian tax at normal marginal rates. In calculating the amount of Australian tax payable, Burton sought to apply a FITO for all US tax paid in respect of the underlying disposal of US assets. The Australian Taxation Office contended that he was only entitled to a FITO for half of the US tax paid, as only half of the gain was included in his Australian assessable income.

While acknowledging that all of the net proceeds of the disposal had been subject to tax in the US, the court unanimously held that this did not mean a FITO would be available for all of the US tax paid. Instead, the court held that it must be determined how much of the net proceeds were included in assessable income. In this case, that amount was only 50% of the gain (after application of capital losses). The court held that this followed from FITO rules that provide that a FITO is available where foreign tax was paid “in respect of an amount that is all or part of an amount included in [his] assessable income for the year.”

In the alternative, Burton advanced the argument that article 22 (Relief from double taxation) of the Australia-US tax treaty effectively required that Australia grant a credit for the full amount of US tax paid. The court rejected this argument on a 2-1 majority basis. The majority held that the reference to "income" in article 22 is to be construed with regard to domestic legislation. As such, because only 50% of the gain was assessable in Australia, article 22 only required Australia to allow a credit for half of the US taxes. As a result, there was no inconsistency between article 22 and the FITO rules.

Whatever the technical arguments, the outcome is a curious result. If the Australian domestic law was like the US law and the taxpayer paid half-rate tax on the full gain, the result would be that all of the US tax paid should be allowed as a FITO. However, the Australian approach achieves a similar result via a different mechanism: full-rate tax on half the gain. In that case, however, the result is that only half of the US tax paid is allowed as a FITO.