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

    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

    Albert was an Australian resident for the whole income year and had no spouse or dependents. 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 income 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 income 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.

    Table: Convert to Australian dollars

    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

    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.

    Cost of a depreciating asset

    the exchange rate that applied at the earlier of when you:

    • began to hold the asset, or
    • paid for it (that is, satisfied your obligations for it).

     

    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.

    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 fact sheets Foreign exchange (forex): the general translation rule (NAT 9339) and Foreign exchange (forex): general information on average rates (NAT 13434), available on our website.

    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.

    Gross income

    $

    Employment income from Australia

    42,000

    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

    54,000

    Expenses

    $

    Medical expenses, after deducting refunds

    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 DGR

    200

    Interest (debt deductions) incurred in deriving dividend income from United Kingdom

    70

    Expenses (debt deductions) incurred in deriving interest income from United Kingdom

    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

    54,000

    less allowable deductions*

    3,000

    Taxable income

    51,000

    *Albert cannot claim a deduction for his $2,500 of 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

    9,900

    Medicare levy payable on taxable income
    ($51,000 x 1.5%)

    765

    Total tax and Medicare levy

    10,665

    less tax offset for medical expenses
    ($2,500 - $1,500) x 20%

    200

    Total tax payable

    4,915

    The tax offset for medical expenses reduces Albert's tax payable. Albert has private patient hospital cover and is therefore 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:

    =

      10,465  
      51,000

    x

    100
    1

    =

    20.5196%

     

     

    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 fall into the passive foreign income class. He also has foreign employment income (from the Unites States and the United Kingdom), which fall into the other foreign income class. As Albert has income from two 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 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 DGR - across both classes of foreign income.

    ANFI for Albert's passive foreign income:

    =

    1,750

    x

         51,000     
    51,000 + 200

    =

    1,743

     

     

    ANFI for Albert's other foreign income:

    =

    9,550

    x

         51,000    
    51,000 + 200

    =

    9,513

     

     

    Step 7: Work out the foreign tax credit limit for each class of foreign income.

    For each class of foreign income, the credit is the lesser of the foreign tax paid and the Australian tax payable.

    Therefore, Albert needs to work out the Australian tax payable on his foreign income from each class. 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:

    $1,743 

    x

    20.5196%

    =

    $357.66

    Other foreign income:

    $9,513 

    x

    20.5196%

    =

    $1,952.03

    Tax payable on his passive foreign income

    As Albert paid $400 in foreign tax on his passive foreign income and this is more than the amount of $357.66 of Australian tax payable, he can claim a foreign tax credit of $357.66. The extra $42.34 of foreign tax that he paid may be carried forward and applied against the Australian tax payable on foreign income he may derive in the next five income years. Note that this carry forward amount is subject to the new rules that apply to income years commencing on or after 1 July 2008. For more information refer to Changes to foreign loss quarantining and foreign tax credit calculation rules - Update October 2008.

    Tax payable on his other foreign income

    As Albert paid $1,800 in foreign tax on his other foreign income and this is less than the amount of $1,952.03 of Australian tax payable, he can only claim a credit of $1,800.00. The extra $296.00 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

    357.66

    Tax credit he can claim on his other foreign income

    1,800.00

    Total foreign tax credit he can claim

    2,157.66

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

    Albert would write $2,157.66 at O item 20 on his tax return (supplementary section).

    Last modified: 28 Oct 2008QC 27910