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 12: 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 + $2,200 + $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 example