• Using pre-commencement excess foreign income tax

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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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    A taxpayer must use pre-commencement excess foreign income tax within five years of the year of income in which the pre-commencement excess foreign income tax arises. For example, any pre-commencement excess foreign income tax that relates to the 2004-05 income year can only be used in the 2008-09 and 2009-10 income years.

    The amount used in any one income year cannot exceed the amount by which the foreign tax paid for that year is less than the taxpayer's foreign income tax offset limit. In effect, the taxpayer can top-up the amount of foreign income tax paid to the foreign tax offset limit using pre-commencement excess foreign income tax amounts.

    Given the five-year limitation rule, taxpayers should use pre-commencement excess foreign income tax on a first-in first-out basis. For example, a taxpayer with pre-commencement excess foreign income tax relating to both the 2003-04 and 2005-06 income years should use those that relate to the 2003-04 income year first as they will expire in 2008-09. Any pre-commencement excess foreign income tax that has not been used within the five year time limit is wasted.

    Example

    Austco is an Australian resident company that converts excess foreign tax credits of $5,000 relating to the 2005-06 income year into pre-commencement excess foreign income tax of $5,000 for that income year.

    For the 2009-10 income year, Austco pays foreign income tax of $7,000 on income included in its assessable income and calculates its foreign income tax offset limit as $10,000. As the tax offset of $7,000 (before the application of the pre-commencement excess foreign income tax) is less than the tax offset limit of $10,000, Austco can add pre-commencement excess foreign tax of $3,000 to the tax offset for 2009-10.

    This leaves $2,000 of unused pre-commencement excess foreign tax.

    For the 2010-11 income year, Austco pays foreign income tax of $4,000 on income included in its assessable income and calculates its foreign income tax offset limit as $5,000. As the tax offset of $4,000 (before the application of any pre-commencement excess foreign income tax) is less than the tax offset limit of $5,000, Austco can add pre-commencement excess foreign income tax of $1,000 to the tax offset for 2010-11.

    This leaves $1,000 of unused pre-commencement excess foreign income tax.

    For the 2011-12 income year, Austco pays foreign income tax of $8,000 on income included in its assessable income and calculates its foreign tax offset limit as $10,000. Although the tax offset of $8,000 (before the application of any pre-commencement excess foreign income tax) is less than the tax offset limit by $2,000, the unused $1,000 of pre-commencement excess foreign income tax cannot be used to increase the tax offset for 2011-12 as it expired in the previous year.

    Last modified: 23 Jul 2009QC 22894