• An example to help you work out your foreign tax credit

    Albert is an Australian resident and is not married. He previously lived in the United Kingdom and now receives a pension and dividend, interest and rental income from the United Kingdom. Albert worked for and was paid by an American company in the United States for 80 days during the year and by his Australian employer in Australia for the remainder of the year.

    All foreign income, deductions and foreign tax paid must be expressed in Australian dollars. The following table, Translate (convert) to Australian dollars, is an example of how you do this. Phone the Tax Office on 13 28 61 to find out the exchange rates.

    Translate (convert) to Australian dollars

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Type of foreign income

    Convert foreign income to Australian dollars at:

    Foreign employment income, pensions and annuities

    the exchange rate that applied at the time you were paid or had the income applied or dealt with on your behalf or as you directed (such as into a bank account), even if no amount was remitted to Australia.

    Foreign business income and other income such as dividends and interest

    the exchange rate that applied at the earlier of when you received or derived the income (or, for statutory income, the earlier of when you received the income or were first required to include it in your assessable income)

    Foreign capital gains

    the exchange rate that applied at the time of the transaction or event for each transaction or event involving an amount of foreign currency (or the market value of property expressed in a foreign currency). For example, if an amount included in the cost base of an asset is expressed in foreign currency, convert that amount into Australian currency on the date that the expenditure was incurred. Convert capital proceeds on the date of the CGT event.

    Foreign tax paid

    the exchange rate that applied at the time the foreign tax was paid

    Foreign deductions (other than capital allowances)

    the exchange rate applicable at the earlier of when the amount was paid or when it became deductible

    Depreciating assets

    the cost of a depreciating asset is to be converted at the exchange rate that applied at the earlier of when you begin to hold the asset or satisfied your obligations for it (ie, when you paid for it). This converted cost is then used to calculate the capital allowance deductible

    Important note

    Regulations registered in April 2005 give many taxpayers the choice of using an average exchange rate when translating foreign currency amounts into Australian currency. These regulations generally commence on 1 July 2003.

    For more information on converting foreign amounts to Australian dollars refer to the Tax Office fact sheets Forex - the general translation rule.

    Below are details of Albert's income, expenses and the foreign tax he paid. All of Albert's foreign income amounts have been converted to Australian dollars.

    Gross income

    $

    Employment income from Australia

    22,000

    Employment income from United States

    6,000

    Pension income from United Kingdom

    4,000

    Rental income from property in United Kingdom

    1,000

    Dividend income from United Kingdom

    600

    Interest income from United Kingdom

    400

    Total gross income

    34,000

       

    Expenses

    $

    Medical expenses

    2,500

    Expenses incurred in deriving employment income from Australia

    2,000

    Expenses incurred in deriving employment income from United States

    450

    Expenses incurred in deriving rental income from United Kingdom

    250

    Gift to an eligible charitable organisation

    200

    Interest (debt deductions) incurred in deriving dividend income

    70

    Expenses (debt deductions) incurred in deriving interest income

    30

    Total expenses

    5,500

       

    Foreign tax paid

    $

    Employment income from United States

    1,800

    Dividend income from United Kingdom

    60

    Interest income from United Kingdom

    40

    Rental income from United Kingdom

    300

    Total foreign tax paid

    2,200

    Example

    Working out Albert's foreign tax credit

    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 $1,500.

    He does this at step 2.

    Step 2: Work out Albert's tax and Medicare levy.

     

    $

    Tax payable on taxable income

    5,680

    Medicare levy payable on taxable income
    ($31,000 x 1.5%)

    465

    Total tax and Medicare levy

    6,145

    less tax offset for medical expenses
    ($2,500 - $1,500) divided by 5

    200

    Total tax payable

    5,945

    Albert has reduced his tax payable by the medical expenses tax offset he is able to claim. As Albert is not married 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

    =

    5,945 
    31,000

    x

    100
    1

    =

    19%

       

    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. 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 foreign income 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
    (other than relevant debt deductions)

    600

    Gross foreign interest income less expenses
    (other than relevant debt deductions)

    400

    Net passive foreign income

    1,750

     

    Albert's other foreign income

    $

    Gross employment income from the United States less expenses ($6,000 - $450)

    5,550

    Gross pension from United Kingdom

    4,000

    Net other foreign income

    9,550

    Step 6: Work out Albert's adjusted net foreign income (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:

    =

    1,750

    x

        31,000    
    31,000 + 200

    =

    1,739

    ANFI for Albert's other foreign income:

    =

    9,550

    x

        31,000    
    31,000 + 200

    =

    9,489

    Step 7: Work out the foreign 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.

    Foreign income that has borne foreign tax is eligible for a foreign tax credit. For each class of income the credit is the lesser of the foreign tax paid, or the Australian tax payable ascertained by applying the average rate of Australian tax to the adjusted net foreign income of that class.

    Passive foreign income = $1,739 x 19% = $330.41

    Other foreign income = $9,489 x 19% = $1,802.91

    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 $330.41 of Australian tax payable, he can claim a foreign tax credit of $330.41. The extra $69.59 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 $1,802.91 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

    $330.41

    Tax credit he can claim on his other foreign income

    $1,800.00

    Total foreign tax credit he can claim

    $2,130.41

    Step 8: Enter the foreign tax credit amount on Albert's tax return.

    Albert would write $2,130.41 at O item 19 on his tax return (supplementary section).

    Last modified: 16 Mar 2007QC 27544