Albert was an Australian resident for the whole year and is not married. He previously lived in the United Kingdom and now receives 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. He also worked for an Australian employer in the United Kingdom for a short period and worked 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 shows you how to do this. Phone us on 13 28 61 to find out the exchange rates.
Type of foreign amount |
Convert foreign amount 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 exchange rate that applied at the earlier of when you begin to hold the asset or satisfied your obligations for it (that is, when you paid for it) - this converted cost is then used to calculate the capital allowance deductible. |
From 1 July 2003, amounts in foreign currency must be converted into Australian currency for taxation purposes at the exchange rates prevailing at specific times as shown in the table in the previous column. However, regulations made in April 2005 may allow you to choose to use an average exchange rate when converting foreign currency amounts into Australian dollars. The regulations allow the use of average rates to have effect from 1 July 2003.
Note, you may choose to use an average exchange rate only where it gives a reasonable approximation of exchange rates that would otherwise be applicable using the rules in the above table.
For more information on the translation of foreign currency amounts to Australian dollars, see the Tax Office fact sheets Translation (conversion) rules and General information on average rates.
Below are details of Albert's income, expenses and the foreign tax he paid. All Albert's foreign income amounts have been converted to Australian dollars.
Employment income from Australia |
$22,000 |
Employment income from United States |
$6,000 |
Employment 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 |
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 a deductible gift recipient |
$200 |
Interest (debt deductions) incurred in deriving dividend income |
$70 |
Expenses (debt deductions) incurred in deriving interest income |
$30 |
Total expenses |
$5,500 |
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 (see Note) |
$3,000 |
Taxable income |
$31,000 |
Note: 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 |
$5,160 |
Medicare levy payable on taxable income |
$465 |
Total tax and Medicare levy |
$5,625 |
less tax offset for medical expenses |
$200 |
Total tax payable |
$5,425 |
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
(5,425 ÷ 31,000) × (100 ÷ 1) = 17.5%
Step 4: Work out whether 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 (from the Unites States and the United Kingdom), 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.
Gross foreign rental income less expenses |
$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 |
Gross employment income from the United States less expenses |
$5,550 |
Gross employment income from the 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 gift to a deductible gift recipient (DGR) - across both classes of foreign income.
ANFI for Albert's passive foreign income:
1,750 × (31,000 ÷ [31,000 + 200]) = 1,739
ANFI for Albert's other foreign income:
9,550 × (31,000 ÷ [31,000 + 200]) = 9,489
Step 7: Work out the foreign tax credit limit for each class of foreign income.
Albert can claim a tax credit for the lesser of the foreign tax paid and the Australian tax payable on his foreign income from each class.
To work out the amount of Australian tax payable on each class of foreign income, Albert multiplies his 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 = $1,739 × 17.5% = $304.32
Other foreign income = $9,489 × 17.5% = $1,660.57
For each class of income the credit is the lesser of the foreign tax paid and the Australian tax payable.
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 $304.32 of Australian tax payable, he can claim a foreign tax credit of $304.32. The extra $95.68 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 more than the amount of $1,660.57 of Australian tax payable, he can only claim a credit of $1,660.57. The extra $139.43 of foreign tax that he paid can be carried forward and applied against the Australian tax payable on any other foreign income he may earn in the next five years.
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 |
$304.32 |
Tax credit he can claim on his other foreign income |
$1,660.57 |
Total foreign tax credit he can claim |
$1,964.89 |
Step 8: Enter the foreign tax credit amount on Albert's tax return.
Albert would write $1,964.89 at O item 19 on his tax return (supplementary section).