Foreign income must be grossed up
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Where you have paid foreign income tax on an amount that forms part of your assessable income, you must include the gross amount (including any tax paid by you) in your assessable income on your tax return.
An Australian-resident taxpayer invests directly in a foreign company, which pays a dividend of $100 from which it deducts $15 withholding tax.
The taxpayer must gross-up the net distribution of $85, adding the foreign income tax withheld of $15, to show $100 in their tax return. This is the amount on which the taxpayer is assessed for income tax purposes.
A special grossing-up rule applies to attributable taxpayers that are deemed to have paid foreign income tax that is actually paid by their controlled foreign company (CFC) or foreign investment fund (FIF). In respect of the attributed income of a CFC or FIF (where the calculation method is used), a notional deduction is allowed for any foreign income tax, income tax or withholding tax it pays. The attributable taxpayer includes in their assessable income this net amount multiplied by their attribution percentage. Thus, the attributable taxpayer is effectively entitled to a deduction for foreign income tax, income tax or withholding tax paid on an amount included in the CFC's or FIF's attributed income.
Where the attributable taxpayer is deemed to have paid the foreign income tax that is actually paid by the CFC or FIF and counts that towards their tax offset, they have to gross-up their attributed income by the amount of foreign income tax (including withholding tax) they are deemed to have paid.
Note that there are special rules for claiming an offset for foreign income tax paid on attributed income.
A co is an Australian-resident company with a 100% interest in Y co, a CFC. Y co works out its notional assessable income as $1.2m and claims a notional allowable deduction of $200,000 for foreign tax paid by it, thereby resulting in attributed income of $1m. A co includes the amount of $1m in its assessable income under section 456, as its attribution percentage is 100%. A co is also required to treat the foreign income tax paid by Y co as having been paid by it under the special tax-paid deeming rules that apply to attributable taxpayers. Accordingly, A co is required to gross-up its attributed income of $1m by the $200,000 of foreign income tax that it is deemed to have paid.
Last modified: 23 Jul 2009QC 22894