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  • Calculating and claiming your foreign income tax offset

    Attention

    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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    You claim the foreign income tax offset in your income tax return.

    Before you calculate your net income, you must convert all foreign income deductions and foreign tax paid to Australian dollars - refer to Converting foreign income to Australian dollars.

    To claim a foreign income tax offset of up to $1,000, you only need to record the actual amount of foreign income tax paid on your assessable income (up to $1,000).

    If you are claiming a foreign income tax offset of more than $1,000, you have to work out your foreign income tax offset limit. This may result in your tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year.

    If you paid foreign income tax after the year in which the related income or gains have been included in your assessable income, you may amend your assessment for that year to claim the offset.

    As a non-refundable tax offset, the foreign income tax offset reduces your income tax payable (excluding Medicare levy). Under the tax offset ordering rules, it is applied after all other non-refundable tax and non-transferable offsets. Once your tax payable has been reduced to nil, any unused foreign income tax offset is not refunded to you, nor can it be carried forward to later income years.

    Calculating your offset limit

    If you are claiming a foreign income tax offset of more than $1,000, you will first need to work out your foreign income tax offset limit.

    Step 1

    Work out the income tax payable by you for the relevant income year disregarding any tax offsets. This amount does not include Medicare levy, Medicare levy surcharge, penalties or interest.

    Step 2

    Work out the income tax that would be payable by you (excluding the Medicare levy and surcharge, penalties and interest), disregarding any tax offsets, if the following assumptions were made:

    • your assessable income did not include:
      • any amount included in your assessable income on which foreign income tax has been paid that counts towards your foreign income tax offset, and
      • any other income or gains from a non-Australian source, and
       
    • you were not entitled to the following (where such deductions are actually allowable):
      • debt deductions attributable to your overseas permanent establishment
      • any other deductions (other than debt deductions) that are reasonably related to any amount covered by the first dot point above, and
      • an amount of the foreign loss component of one or more tax losses deducted in the income year.
       

    For the purpose of this step, where deductions relate exclusively to the disregarded income amounts, you should assume that you were not entitled to these amounts. Whether a deduction reasonably relates to the disregarded assessable income amounts will be a question of fact depending on the circumstances of the taxpayer. Where deductions relate to both disregarded income amounts and other assessable income (as would typically be the case with head office and general administration expenses), you will need to apportion the deductions on a reasonable basis.

    Allowable deductions for items such as gifts, contributions, superannuation and tax agent's fees are not considered to be reasonably related to any amount on which foreign income tax has been paid or other non-Australian source income.

    Step 3

    Take away the result of step 2 from step 1. If the result is greater than $1,000, this is your offset limit.

    Example 15: Foreign income tax offset limit

    Anna, an Australian-resident taxpayer, has income and expenses and pays foreign income tax for the income year as follows:

    Income and deductions

    A$

    Employment income from Australia

    $22,000

    Employment income from United States

    $6,000

    Employment income from United Kingdom

    $4,000

    Rental income from United Kingdom

    $1,000

    Dividend income from United Kingdom

    $600

    Interest income from United Kingdom

    $400

    Total assessable income

    $34,000

    Expenses incurred in deriving employment income from Australia

    $2,000

    Expenses incurred in deriving employment income from United States

    $450

    Expenses incurred in deriving rental income from United Kingdom

    $250

    Interest (debt deduction) incurred in deriving dividend income from United Kingdom

    $70

    Expenses (debt deduction) incurred in deriving interest income from United Kingdom

    $30

    Gift to deductible gift recipient

    $70

    Total allowable deductions

    $2,870

    Taxable income

    $31,130

    Foreign income tax paid

    Tax paid

    A$

    Employment income from United States

    $1,800

    Dividend income from United Kingdom

    $60

    Interest income from United Kingdom

    $40

    Rental income from United Kingdom

    $300

    Total foreign income tax paid

    $2,200

    Anna calculates her foreign income tax offset limit as follows:

    Step 1: Work out the tax payable on her taxable income

    Tax on $31,130: $3,770 (excludes Medicare levy)

    Step 2: Work out the tax that would be payable if:

    (a) Her assessable income does not include any amount in respect of which foreign income tax has been paid, provided that the tax counts towards her foreign income tax offset or other non-Australian source amounts, calculated as follows:

    Tax paid

    A$

    Employment income from United States

    $6,000

    Employment income from United Kingdom

    $4,000

    Rental income from United Kingdom

    $1,000

    Dividend income from United Kingdom

    $600

    Interest income from United Kingdom

    $400

    Total

    $12,000

    Although Anna has not paid foreign income tax on her employment income of $4,000 from the United Kingdom, it is subtracted from her assessable income at this step as it is from a non-Australian source.

    (b) Any expenses that relate to amounts included in her assessable income on which foreign income tax has been paid, provided that tax counts towards her foreign income tax offset, or other non-Australian amounts that are part of her assessable income (excluding debt deductions).

    Expenses

    Type of expense incurred

    (A$)

    Expenses incurred in deriving employment income from United States

    $450

    Expenses incurred in deriving rental income from United Kingdom

    $250

    Total expenses

    $700

    Note: that the debt deductions of $100 that relate to the United Kingdom dividend and interest income are not disregarded as Anna does not have an overseas permanent establishment. Nor is the deduction of $70 for the gift to a deductible gift recipient disregarded, as it does not reasonably relate to the excluded assessable income amounts at step 2(a).

    Calculation

    Taxable income (disregarding step 2(a) amount):

    $22,000

    Less allowable deduction (disregarding step 2(b) amount):

    $2,170

    Taxable income under step 2 assumptions:

    $19,830

    Tax on $19,830: $2,075

    Step 3: Take away the result of step 2 from step 1

    $3,770 − $2,075 = $1695

    This is Anna's foreign income tax offset limit. Although she has paid foreign income tax of $2,200, her foreign income tax offset is limited to $1,695.

    The difference between the foreign income tax that Anna has paid and the offset limit cannot be carried forward to a future income year.

    End of example

    Example 16: Foreign income tax offset limit and net capital gains

    Resident company X's taxable income for the income year is worked out as follows, including the realisation of the following capital gains and losses from a mix of domestic and foreign sources:

    Assessable income

    Domestic (A$)

    Foreign (A$)

    Total (A$)

    Sales revenue

    $60,000

    -

    $60,000

    Net capital gain as calculated below

    -

    $125,000

    $125,000

    Gross assessable income

    -

    -

    $185,000

    Less Allowable deductions from sales revenue (under Australian law)

    -

    -

    $20,000

    Taxable income

    -

    -

    $165,000

    Foreign country capital gains and losses

    Foreign country A assessment

    Purchase price of foreign asset A

    $70,000

    Proceeds from sale of foreign asset A

    $200,000

    Net foreign gain on sale of foreign asset A

    $130,000

    Foreign tax payable (30% of $130,000)

    $39,000

    Foreign country B (nil assessment)

    Purchase price of foreign asset B

    $50,000

    Proceeds from sale of foreign asset B

    $65,000

    Net foreign gain on sale of foreign asset B

    $15,000

    Foreign country B does not impose tax on capital gains made on the disposals of assets

    Foreign country C (capital loss)

    Purchase price of foreign asset C

    $90,000

    Proceeds from sale of foreign asset C

    $50,000

    Loss on sale of foreign asset C

    $(40,000)

    Australian capital gains and losses

    Cost base of asset 1

    $90,000

    Capital proceeds from sale price of asset 1

    $150,000

    Gain on sale of asset 1

    $60,000

    Reduced cost base of asset 2

    $65,000

    Capital proceeds of asset 2

    $25,000

    Loss on sale of asset 2

    $(40,000)

    To calculate the net capital gain, the taxpayer can choose the order in which capital gains are reduced by any capital losses to yield the greatest foreign tax offset as follows:

    Capital gain on sale of foreign asset A

    $130,000

    Add Capital gain on sale of foreign asset B

    $15,000

    Add Capital gain on sale of Australian asset 1

    $60,000

    Deduct Capital loss on sale of foreign asset C

    $(40,000)

    Deduct Loss on sale of Australian asset 2

    $(40,000)

    Subtotal

    $(5,000)

    Net capital gain

    $125,000

    The company calculates the net capital gain to ensure the maximum foreign income tax offset by:

    • firstly, adding together the domestic capital loss and the foreign capital loss
    • secondly, deducting this from the sum of the domestic capital gain and the foreign capital gain on which no foreign tax has been paid.

    Finally, as this yields a capital loss of $5,000, the taxpayer deducts this amount from the foreign capital gain on which foreign tax has been paid. Accordingly, the net capital gain of $125,000 relates entirely to the foreign source gain component on which foreign income tax has been paid.

    The foreign income tax offset limit calculation is as follows:

    Step 1: Work out the tax payable on taxable income.

    $165,000 × 0.30 = $49,500

    Step 2: Work out the tax that would be payable if the net capital gain on which foreign income tax has been paid is not included in the taxpayer's assessable income.

    As all of the net capital gain relates to the foreign source gain component on which foreign income tax has been paid, the amount of $125,000 is treated as if it is not included in assessable income.

    There are no deductions that need to be disregarded.

    Thus, the taxable income under this step would be

    $165,000 − $125,000 = $40,000.

    Tax payable on $40,000 would be 0.30 x $40,000, that is $12,000.

    This is the result of step 2.

    Step 3: Take away the result of step 2 from step 1.

    $49,500 − $12,000 = $37,500

    This is X's foreign income tax offset limit. Although X has paid foreign income tax of $39,000 on the net capital gain included in its assessable income, its foreign income tax offset is limited to $37,500.

    End of example

    Special amendment rules for foreign income tax offsets

    Differences between the Australian and foreign tax systems may lead to you paying foreign income tax in a different income year to that in which you include the related income or gains in your Australian assessable income.

    If you paid foreign income tax after the year in which the related income or gains have been included in your Australian assessable income, you can amend your assessment for that year to claim the offset. You can lodge an amended assessment within four years of paying foreign income tax that counts towards your tax offset. This time period applies irrespective of when the income or gains were included in your Australian assessable income. In this situation, the foreign income tax must be paid after you have lodged your Australian income tax return for the relevant year.

    The four-year amendment period also applies where there has been an increase or decrease in the amount of foreign income tax paid that counts towards your tax offset. The special amendment rules also apply to amendments initiated by the Tax Office, which may have the effect of extending the normal period of review. In these cases, the four year period starts when the increase in foreign income tax has been paid or when the foreign income tax has been reduced (for example by way of a refund).

    The special amendment rules apply only where you have paid foreign income tax or there has been an increase or decrease in the tax paid that counts towards your tax offset. In all other circumstances, the normal amendment rules apply.

    For example, where an audit by the Tax Office has detected an incorrect calculation of the foreign income tax offset limit affecting the amount of the foreign income tax offset previously claimed, we can only amend a taxpayer's assessment within the usual time limits set out in section 170 of the ITAA 1936.

    Example 17: Amendment for foreign income tax offset

    Aust Co, an Australian resident company, sells a rental property in the US, making a gain in the 2009-10 income year. The gain is taxed in the US and Australia. Aust Co pays the US income tax before lodging its Australian return for the 2009-10 income year.

    In February 2012, Aust Co receives a refund of part of the US tax paid because of the favourable outcome of a dispute over the calculation of the gain. An amendment to Aust Co's 2009-10 assessment to reflect the reduction in US tax paid, and consequently its foreign income tax offset, can be made on or before February 2016.

    End of example
    Last modified: 05 Aug 2020QC 22894