Paying Foreign Tax on a Foreign Property Sale - A concern

So you sell your UK or US or other foreign property and source tax is applied to the gain. No problem, you lodge your Australian return and claim the tax credit under the double tax agreement, right ?

Well no. In a recent Federal Court decision (Burton v FCT) the court upheld a ATO decision to reduce the tax credit allowed.

To assist explanation I will keep it simple and illustrate the issue with an example.

Fred has a US property owned for 10 years. He sells it and is liable to 25% tax on the $200K USD profit based on USD. He pays the IRS.

Fred then calculates and lodges an Australian tax return with the AUD value of that gain. Lets say it was also $200KAUD. However he claims the 50% general CGT discount. Fred seeks to claim the AUD value of the $50K USD tax he paid since the Australian tax is full and final.

The ATO will deny 50% of the tax credit since Fred is only liable to pay tax on 50% of the income.

The court upheld the view that the tax credit is allowed where both the foreign and Australian assessable amount are the same amount. Since Fred gets a 50% CGT discount he loses 50% of the tax credit.

This decision is pending appeal.
Strategy : Fred may be better off NOT claiming the 50% CGT discount and considering whether the foreign property was originally his home. He may be able to use the 6 year absence exemption so that 4/10th is taxable AND the full tax credit allowed