• Foreign income tax paid on part of an amount included in assessable income

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    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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    In some situations, the foreign income tax paid relates to only part of an amount included in the taxpayer's assessable income. This typically applies where a foreign source gain on which foreign income tax has been paid is part of a net amount included in a taxpayer's assessable income. In these situations, the foreign income tax counts towards the tax offset only to the extent that it is paid in respect of that part of the amount that is included in the taxpayer's assessable income.

    This may be relevant where, for example, a taxpayer has both a capital gain and a capital loss and only the net amount is included in their assessable income. Under the capital gains tax rules, a taxpayer can choose the order in which capital losses are offset against gains. In particular, a taxpayer can choose to offset capital losses (whether current year or prior-year) firstly against domestic capital gains or foreign gains on which no foreign tax has been paid. Such an ordering of the losses maximises the foreign source capital gain component of a net capital gain on which foreign income tax has been paid.

    Example

    Company C derives the following capital gains and losses on disposals of assets during the year:

    Domestic capital gain on land:

    $100,000

    Foreign capital gain on asset B:

    $50,000 (no foreign tax paid)

    Foreign capital gain on asset C:

    $20,000 (on which foreign income tax of $2000 is paid)

    Domestic capital loss on asset A:

    ($150,000)

    Net capital gain:

    $20,000

    As the foreign income tax offset can only apply where foreign income tax has been paid on an amount included in the taxpayer assessable income, company C chooses to offset its domestic capital loss on asset A of $150,000 first against the domestic gain on land of $100,000, and the balance of $50,000 against the foreign capital gain on asset B on which no foreign income tax has been paid. Therefore, the net capital gain of $20,000 relates to the foreign capital gain on asset C. As this is the amount included in assessable income on which foreign income tax has been paid, the tax paid of $2,000 counts towards company C's foreign income tax offset.

    Where foreign income tax is paid on a foreign source gain but the taxpayer is in an overall capital loss situation for the income year because of other capital losses, none of the foreign income tax paid counts towards a tax offset because the gain is not included in the taxpayer's assessable income.

    Example

    On the sale of an asset, an Australian-resident taxpayer makes a foreign source capital gain of $10,000, on which foreign income tax of $2,000 has been paid.

    The taxpayer also realises a capital loss of $10,000 on the disposal of an Australian asset.

    The loss of $10,000 is offset against the foreign gain of $10,000, which results in no net capital gain being included in the taxpayer's assessable income. As their assessable income does not include an amount on which foreign income tax has been paid, the taxpayer is not eligible for a foreign income tax offset for the foreign income tax paid on the foreign source capital gain.

    The same principle applies where foreign income tax has been paid on an amount that forms part of a partnership or trust's assessable income, but because there is an overall partnership or trust loss for the year (rather than there being net income), the relevant foreign income is not included in the partner or beneficiary's assessable income.

    Last modified: 23 Jul 2009QC 22894