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I would like your opinion on the following situation:
SMSF paying an Account Based Pension to all members and owns properties in New Zealand. The Fund is required to lodge a Tax return In NZ and has in the past 3 years had to pay New Zealand Income Tax. Obviously, because of the pension payments, the Fund has exempt current pension income, but does have Concessional Contributions (tax paid thereon). As the tax in NZ is levied on the rental income, which in the normal course would ECPI, how is the New Zealand Tax paid treated in the Income Tax Return. Initially I would say as an expense with no tax credit allowed as would be in the normal situation which involves "Tax Treaties"...
Your advice is greatly appreciated.
Hi Gino
My view is that no foreign tax credit would be allowed in the SMSF tax return on the basis that the rental income is exempt from tax in the SMSF tax return. Foreign tax credits are intended so that tax is not paid twice on the same income in both New Zealand and Australia. As the income is exempt in the SMSF tax return (due to ECPI) there are no tax credits to take up.
Guidance per the ATO:
"The SMSF may be able to claim a foreign income tax offset where it has paid foreign income tax on an amount included in its assessable income. The SMSF’s foreign income tax offset is limited to the lesser of:
the foreign income tax that the SMSF paid (or is taken to have paid), and
the SMSF's foreign income tax offset limit (which is $1,000 or the amount calculated under paragraph 770-75(2)(b) of the ITAA 1997, whichever is greater).
Write at C1 the amount that the SMSF can claim as a foreign income tax offset."
That is if the rental income not included in the SMSF tax return as assessable income there are no foreign tax offsets to claim.
I have not come across this specific issue before re tax paid on New Zealand rental income so if anyone else has a view that would be appreciated.
Thanks
SMSF AAA