• Working out the credit

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Your foreign tax credit entitlement for a class of foreign income is the lesser of:

    • the creditable foreign tax which you have paid on that class of income and
    • the Australian tax payable on that class of income, worked out using the above procedure.

    The following example shows the steps to use to work out your foreign tax credit.

    Example 4
    Working out the foreign tax credit

    An individual has:

    $

    domestic income

    7,000

    passive income - net of foreign tax

    2,000

    foreign tax paid - passive income

    200

    other income - net of foreign tax

    5,000

    foreign tax paid - other income

    1,000

    apportionable deductions

    100

    Step 1

    Work out taxable income

    Gross up foreign income by the amount of creditable foreign tax paid:

    Assessable passive income (2,000 + 200)

    2,200

    Assessable other income (5,000 + 1,000)

    6,000

    Taxable income (7,000 + 2200 + 6,000 - 100)

    15,100

    Step 2

    Work out the average rate (AR) of Australian tax

    AR =

    gross tax + Medicare levy - rebates
    taxable income

    Gross tax on 15,100

    1,940.00

    Medicare levy

    226.50

    Rebates

    0

    AR =

    1,940 + 226.50 - 0
    15,100

     

    0.144

    Step 3

    Work out adjusted net foreign income.

    For the passive class of income:

    ANFI (passive income) =

    NFI x TI
    TI + AD

    NFI - net foreign passive income

    2,200

    TI - taxable income

    15,100

    AD - apportionable deductions

    100

    ANFI (passive income) =

    2,200 x 15,100
    15,100 + 100

     

    2,185.53

    For the other class of income:

    NFI - net foreign passive income

    6,000

    TI - taxable income

    15,100

    AD - apportionable deductions

    100

    ANFI (other income) =

    6,000 x 15,100
    15,100 + 100

     

    5,960.53

    Step 4

    Work out the Australian tax payable (ATP) on each class of income.

    For foreign passive income:

    ATP = AR x ANFI (passive income)

    ATP = 0.144 x 2,185.53 = 314.72

    For foreign other income:

    ATP = AR x ANFI (other income)

    ATP = 0.144 x 5,960.53 = 858.32

    Step 5

    Determine allowable foreign tax credit for each class of foreign income.

     

    $

    Foreign tax paid on passive income

    200

    Australian tax payable

    314.72

    As the foreign tax paid is less than the Australian tax payable, the foreign tax credit is

    200

    Foreign tax paid on other income

    1,000

    Australian tax payable

    858.32

    As the foreign tax paid is more than the Australian tax payable, the foreign tax credit is limited to the extent of the Australian tax payable on the foreign income - that is, $858.32.

    The excess credit of $141.68 can be carried forward for offset in later years against Australian tax payable on the same class of foreign income.

    Last modified: 05 Dec 2006QC 17522