Working out the credit
Warning:
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
End of attentionYour 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 × TI) ÷ (TI + AD)
|
NFI - net foreign passive income
|
$2,200
|
TI - taxable income
|
$15,100
|
AD - apportionable deductions
|
$100
|
ANFI (passive income) = (2,200 × 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 × $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 × ANFI (passive income)
ATP = 0.144 × 2,185.53 = 314.72
For foreign other income:
ATP = AR × ANFI (other income)
ATP = 0.144 × 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.
End of exampleCarry forward of excess foreign tax credits
You will have an excess foreign tax credit for an income year if the amount of foreign tax you have paid is more than the Australian tax payable on that class of foreign income.
You may carry forward an excess foreign tax credit that arises in an income year for a class of foreign income for five years immediately following that income year. Your excess credit for a class of income may only be used where there is a credit shortfall for the same class of income in a later year. A credit shortfall will arise where the credit allowed for a class of foreign income for an income year is less than the Australian tax payable on that class of foreign income.
If you have incurred a loss for a class of foreign income, you cannot claim a tax credit in that year because the Australian tax payable on that class of income is nil. You may, however, carry forward the foreign tax credit relating to that class of income to subsequent years.
Last modified: 05 Dec 2006QC 17522