The foreign tax must be foreign income tax



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To count towards a tax offset, foreign income tax must be imposed under a law other than an Australian law and be:

  • a tax on income
  • a tax on profits or gains, whether of an income or capital nature, or
  • any other tax that is subject to an agreement covered by the International Tax Agreements Act 1953 (Agreements Act).

The foreign income tax includes taxes similar to Australian withholding tax that is imposed in place of a tax on the net amount of income.

(For examples, refer to Taxes imposed by Australia's major trading partners for which a foreign income tax offset is available.)

The foreign income tax must be correctly imposed under the relevant foreign law and in accordance with any tax treaty the country has with Australia. For example, if country A is limited under a tax treaty to taxing interest derived in that country by an Australian resident to 10% but imposes a domestic tax rate of 25% for interest derived by all foreign residents, only 10% of the tax counts towards the tax offset. The taxpayer would need to seek a refund of the balance (that is, 15%) from country A's tax authority.

The foreign income tax may be imposed at a supra-national, national, state/provincial or local/municipal level. An example of a supra-national tax is that imposed by the European Union on pensions paid to its former employees.

Last modified: 23 Jul 2009QC 22894