Burton v Commissioner of Taxation

In the case of Burton v Commissioner of Taxation, the taxpayer, Mr Burton, appealed against the Federal Court's decision that he was not entitled to a full foreign income tax offset (FITO) in respect of tax paid in the United States on gains from the sale of assets. The Commissioner of Taxation argued that Mr Burton was only entitled to a FITO for the portion of the United States tax that corresponded to the Australian net capital gain, which was subject to a 50% discount. Mr Burton contended that he should be able to claim a FITO for the full amount of tax paid in the United States.

The primary legal issue before the court was whether Mr Burton was entitled to a FITO for the full amount of tax paid in the United States on the gains, or if the offset should be limited to the portion corresponding to the Australian net capital gain. The court also needed to determine whether there was any inconsistency between Article 22(2) of the double tax convention between Australia and the United States and section 770-10 of the Income Tax Assessment Act 1997 (Cth).

The court held that Mr Burton was not entitled to a FITO for the full amount of tax paid in the United States. The court reasoned that, pursuant to Article 22(2) of the double tax convention, the United States tax paid in respect of income derived from sources in the United States should be allowed as a credit against Australian tax payable. However, this credit should not exceed the amount of Australian tax payable on the income or any class thereof or on income from sources outside Australia. Since the Australian net capital gain was subject to a 50% discount, the court concluded that the FITO should be limited to the portion corresponding to the Australian net capital gain.

The court further held that there was no inconsistency between Article 22(2) of the double tax convention and section 770-10 of the Income Tax Assessment Act 1997 (Cth). The court found that the plain language of Article 22(2) required Australia to allow a credit against Australian tax for the US tax paid "in respect of income derived from sources in the United States." The court held that this referred to the whole of the gain taxed in the United States, rather than the discounted gain taxed in Australia.

The appeal was dismissed, and Mr Burton was ordered to pay the respondent's costs of and incidental to the appeal.