Working out a foreign tax credit when a dividend is paid from income that was previously attributed to an Australian resident company



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A dividend paid out of income previously attributed to an Australian resident is non-assessable non-exempt income - see part 1 of this chapter. In addition, an Australian resident company is allowed a credit for foreign tax - including foreign underlying tax - paid on a non-portfolio dividend from attributed income. The credit for the underlying tax is limited to the amount by which the section 23AI part of the dividend would have been greater if no foreign tax had been paid.

The formula to work out the foreign tax for which a credit is due when a dividend is received from previously attributed income is:


FTP = (EP x DT) + (AEP x UT) - AT


foreign tax paid on previously attributed income for which a credit is now allowable


percentage of the payment which is non-assessable non-exempt because the income has been previously attributed


amount of foreign tax which the taxpayer is taken to have paid, and to have been personally liable for, in relation to the attribution account payment


percentage that would be EP if the attribution account payment were reduced by any part of the payment that is non-assessable non-exempt income under section 23AJ


where the taxpayer is a company and the attribution account payment is a non-portfolio dividend, UT equals the amount by which the section 23AI non-assessable non-exempt part would have been greater if an attribution account entity had not paid foreign tax on its profits


amount of the attributed tax account debit arising from the payment of the dividend that is equal to or less than AEP x UT

Example 18 - Credit for foreign taxes on a dividend paid from profits attributed to an Australian company

Austco has a wholly owned subsidiary, Subco, in an unlisted country. Subco had distributable profits of $10,000 on which it paid foreign tax of $1,000. These profits have previously been attributed to Austco.

On 1 August 2004, Subco paid a dividend of $10,000 to Austco. The unlisted country levied dividend withholding tax at a rate of 10%.

The dividend received by Austco is non-assessable non-exempt income because it was paid from previously attributed income. At the attribution stage, Austco would have received a credit of $1,000 for foreign tax paid.

Even though the dividend is not included in Austco's assessable income, a foreign tax credit is available for withholding tax and underlying tax relating to the dividend. This is because the profits out of which the dividend was paid were attributed to Austco and taxed in Australia.

The method by which this credit is granted is as follows:

Work out the foreign tax credit for dividend withholding tax and for underlying tax on the dividend as though the dividend was paid from income that had not been attributed to Austco.

The formula for working out the foreign tax credit Austco can claim is as follows:

FTP = (EP x DT) + (AEP x UT) - AT

This formula can be broken down as follows:


= percentage of the dividend paid from previously attributed income x tax paid on the dividend


= 100% x $1,000 (dividend withholding tax)


= $1,000


= adjusted exempt percentage of the dividend x underlying tax paid on the dividend (excluding tax paid under a foreign accruals regime)


= 100% x $1,000


= $1,000


= tax for which a credit was allowed when the income of the unlisted country CFC was attributed to Austco


= $1,000


= $1,000 + $1,000 - $1,000


= $1,000

In this example, when the income of $10,000 was attributed to Austco and a credit was given for $1,000, Austco would have opened accounts as follows:

Attribution account for Subco

Attributed tax account for Subco

Attributed income


Tax credited


When the dividend is received, Austco will debit the attribution account $10,000 and treat the dividend as non-assessable non-exempt income. It will also debit $1,000 to the attributed tax account.

This debit is the amount referred to as AT. Attributed tax accounts are dealt with below.

Last modified: 05 Dec 2006QC 18000