You will not be able to work out your foreign tax credit if you have shown:
- capital gains at A item 17
- exempt foreign employment income at N item 19 on your tax return.
The Australian Taxation Office (ATO) will work it out for you.
If this is the case, print 'Schedule of additional information-Question 19' on the top of a separate piece of paper and explain your situation. Include your name, address, tax file number, each type and amount of foreign income received and any foreign tax paid. Print X in the Yes box at Taxpayer's declaration question 2a on page 8 of your tax return. Sign and attach your schedule to page 3 of your tax return. If you have no capital gain or no exempt foreign employment income, work through the following steps to find out your foreign tax credit. A practical example follows step 8.
Step 1
Work out your taxable income. You will need to fill in the rest of your tax return before you can do this. Your taxable income is the amount at $ on page 3 of your tax return.
Step 2
Work out the amount of gross tax, Medicare levy and, if applicable, Medicare levy surcharge (MLS) payable on your taxable income by referring to the calculation pages in TaxPack 2001.
Step 3
Work out the average rate of Australian tax payable on your taxable income using the following formula:
Average rate of tax = (gross tax + Medicare levy + MLS − qualifying tax offsets) ÷ taxable income
The qualifying tax offsets you can use to work out your average rate of Australian tax are:
- spouse, child-housekeeper or housekeeper
- sole parent
- overseas forces or zone
- medical expenses
- invalid relative
- parent or spouse's parent
- certain low income taxpayer.
A description of these can be found in the Tax offsets sections of TaxPack 2001 and TaxPack 2001 supplement. Step 3 of the example shows you how to work out your average rate of Australian tax.
Step 4
Work out if you have foreign income from more than one class. Foreign income is divided into different classes for the purpose of allowing a foreign tax credit. These are:
- passive income
- lump sum payments from non-resident superannuation funds that are taxed under section 27CAA of the Income Tax Assessment Act 1936
- other foreign income.
Most taxpayers will only have passive foreign income and other foreign income.
What is passive foreign income?
Passive income includes:
- foreign dividends, interest, rental income and royalties
- assessable foreign annuities
- amounts for the assignment of a patent or copyright
- foreign capital gains and passive commodity gains
- attributed foreign income.
What are lump sum payments from non-resident superannuation funds?
Certain lump sum payments made from non-resident superannuation funds are subject to special tax rules under section 27CAA. These payments form their own class of foreign income.
What is other foreign income?
Other foreign income is foreign income that does not fit into either of the other classes of income. It includes income from commercial activities, salary or wages and most pensions.
Step 5
Work out your net income for each class of foreign income. Net foreign income is your gross assessable income less the following deductions:
- expenses directly related to that class of foreign income
- any domestic loss carried forward from a previous year that you have elected to use against your foreign income
- other deductions relating to that class of foreign income.
Step 5 of the example shows you how to do this.
Step 6
Work out the adjusted net foreign income (ANFI) for each class of foreign income. This involves allocating any apportionable deductions that you are able to claim between each class of foreign income. Apportionable deductions are those deductions of a concessional nature which do not relate directly to income-producing activities-for example, gifts to eligible charitable organisations.
If you don't have any apportionable deductions then your ANFI will equal your net foreign income.
There are three methods for working out ANFI. Where net foreign income is less than the sum of taxable income and apportionable deductions, as is most often the case, ANFI for each class of income equals:
Net foreign income × (taxable income ÷ (taxable income + apportionable deductions))
The other methods are:
- If your net income consists of one class of income and the amount exceeds the sum of your taxable income plus apportionable deductions, your ANFI will equal your taxable income.
- If your net foreign income consists of two or more classes of income and your combined net foreign income from all classes exceeds the sum of your taxable income plus apportionable deductions, your ANFI for each class will equal your taxable income divided proportionately into each class of income.
Step 7
Work out the credit limit for each class of foreign income.
The foreign tax credit that you are entitled to receive is limited to the lesser of:
- the foreign tax you have paid on that class of foreign income, and
- the Australian tax payable on that class of foreign income.
The Australian tax payable in relation to a class of foreign income equals:
ANFI × average rate of Australian tax
The amount of credit you are able to claim here may be further limited by a taxation agreement Australia has with the country in which you earned the income. If you received income from a country which has a taxation agreement with Australia and that agreement limits the amount of tax that the foreign country can levy on your income, the amount of foreign tax credit you are allowed is limited to the amount payable under the agreement. If the foreign country has deducted more tax than is permitted under the agreement, you will need to seek a refund of the excess tax from the tax authority of that country.
The tax agreements can be found in the International Tax Agreements Act 1953.
For example, if you have a foreign pension or annuity which is taxable in Australia and tax has been taken from the payment by the country that paid it, you may have to claim a refund of that tax rather than a foreign tax credit. This would be the case if tax was deducted from a pension or annuity you received but, because of a tax agreement Australia has with that country, Australia is the only country allowed to tax your pension.
Claiming a refund generally involves filling in a special claim form. This is available from the tax authority of the country that paid the pension or annuity. Step 7 of the example will show you how to work out your credit limit.
Step 8
Write the amount of credit you are able to claim-from step 7-at O item 19 on your tax return.