• Working out your Australian tax payable

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    Warning:

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

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    The foreign tax credit you are allowed for each class of foreign income is limited to the Australian tax payable on that class of income. Therefore, you first must work out the Australian tax payable.

    To do this, multiply your average rate of Australian tax by your adjusted net foreign income. Deduct any rebates which apply to that income - apart from a rebate under an Act fixing the rates of income tax or under an Act imposing income tax. Expressed as a formula, the calculation is as follows:

    ATP = AR X ANFI

    ATP

    Australian tax payable

    AR

    average rate of Australian tax

    ANFI

    adjusted net foreign income

    How is the average rate of Australian tax worked out?

    The average rate of Australian tax (AR) is worked out by dividing the gross tax on your taxable income less certain rebates by your taxable income. Expressed as a formula, the calculation is as follows:

    AR

    =

    gross tax + Medicare levy - rebates
                
       taxable income

    For this calculation, deduct concessional, zone or overseas service rebates.

    What is the adjusted net foreign income?

    The adjusted net foreign income is your net foreign income adjusted for apportionable deductions. Apportionable deductions are deductions of a concessional nature that do not relate directly to income producing activities - for example, gifts.

    Net foreign income is your gross assessable foreign income less:

    • allowable deductions relating exclusively to your foreign income
    • any domestic loss carried forward that you have elected to use against your foreign income
    • deductions allowed as being appropriately related to your foreign income.

    How is adjusted net foreign income determined?

    Your adjusted net foreign income is determined as follows:

    • If your net foreign income exceeds the sum of your taxable income plus apportionable deductions, your adjusted net foreign income will equal your taxable income
    • If your net foreign income consists of two or more classes of income - that is, quarantining applies - and your combined net foreign income from all classes is more than the sum of your taxable income plus apportionable deductions, your adjusted net foreign income (ANFI) for each class will equal your taxable income. This is divided proportionately, as shown in example 10, into:

    ANFI - passive income

    ANFI - offshore banking income

    ANFI - lump sum payments assessable under section 27CAA

    ANFI - other income

    • In any other case, your adjusted net foreign income is your net foreign income multiplied by your taxable income divided by the total of your taxable income and apportionable deductions. Expressed as a formula, the calculation is as follows:

    ANFI    =

    NFI    x

         TI     
     TI + AD

    ANFI

    = adjusted net foreign income

    NFI

    = net foreign income of a class

    TI

    = taxable income

    AD

    = apportionable deductions

    Example 10

    Working out adjusted net foreign income

    An individual has:

    $

    Domestic source income

    7,000

    Allowable deductions from domestic source income

    10,000

    net passive foreign income

    2,000

    net other foreign income

    5,000

    apportionable deductions

    100

    Taxable income
    ($7,000 - $10,000 + $2,000 + $5,000 - $100)

    3,900

    Taxable income plus apportionable deductions
    ($3,900 + $100)

    4,000

    Net foreign income
    ($2,000 + $5,000)

    7,000

    The net foreign income is greater than the taxable income and apportionable deductions. Therefore, the adjusted net foreign income is taken to equal taxable income. As there are two classes of foreign income, it is necessary to apportion the adjusted net foreign income into the relevant classes - that is, passive income and other income.

    The taxpayer's passive income is 2/7 and other income 5/7 of the combined net foreign income. The adjusted net foreign income for each class is as follows:

    $

    ANFI - passive Income
    (2/7 of the taxable income of $3,900)

    1,114

    ANFI - other Income
    (5/7 of the taxable income of $3,900)

    2,786

    Example 11

    Working out adjusted net foreign income

    An individual has:

    $

    Domestic income

    7,000

    passive foreign income

    2,000

    other foreign income

    5,000

    apportionable deductions

    100

    First work out ANFI for passive income:

    The taxpayer's taxable income
    ($7,000 + $2,000 + $5,000 - $100)

    13,900

    ANFI - passive income

     

    2,000    x

       13,900   
    (13,900+100)

     

    1,986

    then work out ANFI for other income:

    ANFI - other income

     

    5,000    x

       13,900   
    (13,900+100)

     

    4,964

    Last modified: 05 Dec 2006QC 18000