Why the Burton 'foreign tax credit' case is important for your client investing in the USA

Updated: Feb 3

Example of tax consequences of an Australian tax resident selling an asset.

Given the result of Burton’s case [Burton v Commissioner of Taxation [2019] FCAFC 141], an Australian resident investing in the USA is only able to apply the foreign tax credits in so far as they apply to the taxable portion of the capital gain being taxed in Australia. The Australia-US DTA provides not further relief.

Let’s consider how this would look in a situation that compares the sale of a long term capital asset held in the US, NZ and Australia.

Example Let’s assume that Amy is an Australian tax resident who has two property investments, one in the USA and one in New Zealand. Assume also that:

- There is no cost base on any of these assets;

- Amy has owned a $1,000,000 investment property in NZ for more than 12 months. NZ does not tax domestic capital gains;

- Amy has also owned a $1,000,000 investment property in the US for more than 12 months. The US does tax capital gains, however it taxes capital gains on assets that have been held for more than a year at a concessional rate. For ease of calculations we will assume the top income rate of 20% applies;

- Amy also owns a $1,000,000 investment in Australia, which she has also held for over 12 months. This means she will only be taxed on half of the capital gain in Australia. For ease of calculations we will assume the flat top marginal rate and medicare levy applies, 47%;

- Amy sells all 3 investments in the same financial year for AUD$1,000,000 each;