Step 1 Work out Albert's taxable income
Assessable income |
$34,000 |
less allowable deductions |
$3,000 |
Taxable income |
$31,000 |
Albert cannot claim a deduction for his medical expenses but he can claim a tax offset for them for amounts above $1,250. He does this at step 2.
Step 2 Work out the tax and Medicare levy Albert must pay on his taxable income
Tax payable on taxable income |
$6,562 |
Medicare levy payable on taxable income |
$465 |
Total tax and Medicare levy |
$7,027 |
less rebate for medical expenses |
$250 |
Total tax payable |
$6,777 |
Albert has reduced his tax payable by the medical expenses he is able to claim. As Albert is unmarried and his taxable income is less than $50,000, he is not liable for the Medicare levy surcharge.
Step 3 Work out the average rate of tax payable on Albert's taxable income
Albert's average rate of Australian tax:
($6,777 ÷ $31,000) × (100 ÷ 1) = 21.9%
Step 4 Work out if Albert has more than one class of foreign income
Albert has foreign rental income, foreign dividends and foreign interest which all fall into the passive foreign income class. He also has foreign employment and foreign pension income which fall into the other foreign income class of income.
As Albert has income from both classes, he will have to do two separate calculations.
Step 5 Work out Albert's net foreign income for each class
Albert needs to work out the net foreign income for two classes of income-passive and other foreign income.
Albert's passive foreign income
Gross foreign rental income less expenses |
$750 |
Gross foreign dividend income less expenses ($600 − $70) |
$530 |
Gross foreign interest income less expenses ($400 − $30) |
$370 |
Net passive foreign income |
$1,650 |
Albert's other foreign income
Gross employment income from the United States less expenses ($6,000 − $450) |
$5,550 |
Gross pension from the United Kingdom |
$4,000 |
Net other foreign income |
$9,550 |
Step 6 Work out the ANFI for each class
This involves allocating the apportionable deduction-a $200 donation to a charitable organisation-across both classes of foreign income.
ANFI for Albert's passive foreign income:
$1,650 × ($31,000 ÷ ($31,000 + $200) = $1,639
ANFI for Albert's other foreign income:
$9,550 × ($31,000 ÷ ($31,000 + $200) = $9,489
Step 7 Work out the tax credit limit for each class of foreign income
Work out the amount of Australian tax payable on each class of foreign income. This is done by multiplying Albert's ANFI-worked out at step 6-by his average rate of Australian tax-worked out at step 3 for each class of income.
Passive foreign income = $1,639 × 21.9% = $358.94
Other foreign income = $9,489 × 21.9% = $2,078.09
These are the amounts of Australian tax payable on each class of income.
Albert can claim a tax credit for the lesser of foreign tax paid or Australian tax payable on his foreign income from each class.
Tax payable on his passive foreign income
As Albert paid $400 in foreign tax on this income and this is more than the amount of $358.94 of Australian tax payable, he can claim a foreign tax credit of $358.94. The extra $41.06 of foreign tax that he paid can be carried forward and applied against the Australian tax payable on any passive foreign income he may earn in the next five years.
Tax payable on his other foreign income
As Albert paid $1,800 in foreign tax on this income and this is less than the amount of $2,078.09 of Australian tax payable, he can only claim a credit of $1,800.
Albert must now add the amount of tax credit he can claim on his passive foreign income to the tax credit he can claim on his other foreign income
Tax credit Albert can claim on his passive foreign income |
$358.94 |
Tax credit he can claim on his other foreign income |
$1,800.00 |
Total foreign tax credit he can claim |
$2,158.94 |
Step 8 The amount of tax credit that Albert can claim on his tax return
Albert would write $2,158.94 at O item 19 on his tax return.