1. Introduction

In a recent decision, the Federal Court of Australia dealt with an intriguing question: could a taxpayer (tax resident of Australia) disproportionately claim (excessive) foreign tax credit? That is, though only 50% of the capital gain derived from sale of investments in the United States was taxable in Australia, could the taxpayer claim foreign tax credit in Australia for the US tax paid on the entire amount of the capital gain? In that context, the Australian court examined Art. 22(2) of the tax treaty between Australia and the United States.

A plain reading of Art. 22(2) of the US-Australia tax treaty may (deceptively) give an impression that it is a rather simple provision. Not only that the matter reached the Federal Court of Australia (which was not the first judicial forum), but also the three judges on the bench could not reach a unanimous conclusion. That is a testimony supporting the view that, in practice, the issue of foreign tax credit involves far more intricate aspects....