Life insurance companies
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The core rules for the foreign income tax offset apply to life insurance companies. However, as the income of a life insurance company is taxed at two different rates (ordinary class, taxed at 30%, and complying superannuation/FHSA class, taxed at 15%), at step 2 of the foreign income tax offset limit calculation, it is necessary to determine the amount of assessable income in each class on which foreign income tax has been paid.
Life Insurance Co derives assessable income of $5m in the ordinary class and $5m in the complying superannuation/FHSA class. The ordinary class of income includes $1m on which foreign income tax of $200,000 is paid and the complying superannuation/FHSA class of income includes $2m on which foreign income tax of $400,000 has been paid. Assume there are no allowable deductions in relation to the classes of assessable income.
The limit is worked out as follows:
Step 1: Work out the tax payable on Life Insurance Co's taxable income
Tax on ordinary class of assessable income: $5m x 30% = $1.5M
Tax on complying superannuation/FHSA class: $5m x 15% = $750,000
Total tax payable: $2.25M
This is the result of step 1.
Step 2:Work out the tax that would be payable if the income of the two classes on which foreign income tax has been paid is not included in Life Insurance Co's assessable income
There are two income amounts on which foreign income tax has been paid that need to be excluded from assessable income for the purposes of this step:
- $1m that belongs to the ordinary class of assessable income
- $2m that belongs to the complying superannuation/FHSA class.
In working out the tax that would have been payable had these amounts not been included in assessable income, it is necessary to identify the relevant class to which such amounts belong as follows:
Tax on ordinary class (excluding $1m): ($5m - $1m) x 30% = $1,200,000
Tax on complying superannuation/FHSA class ($5m - $2m) x 15% = $450,000
Total tax that would be payable: $1,650,000
This is the result of step 2.
Step 3:Take away the result of step 2 from step 1
$2.25m - $1.65m = $600,000
This is the offset limit. As the actual foreign income tax paid on the two income amounts is also $600,000, the foreign income tax offset of Life Insurance Co is $600,000.
Foreign income tax paid on non-assessable non-exempt income derived form segregated exempt assets does not count towards a tax offset.
Last modified: 23 Jul 2009QC 22894