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Working out Albert's foreign tax credit

Last updated 4 December 2006

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
($31,000 × 1.5%)

$465

Total tax and Medicare levy

$7,027

less rebate for medical expenses
($2,500 − $1,250) ÷ 5

$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
($1,000-$250)

$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.

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