When a foreign income tax offset applies
To be entitled to a foreign income tax offset:
The offset is available in the income year in which the income or gain (on which the foreign income tax has been paid) forms part of your income in Australia.
Foreign tax must be foreign income tax
To count towards a tax offset, foreign income tax must be imposed under a law other than an Australian law and be:
- a tax on income
- a tax on profits or gains, whether of an income or capital nature, or
- any other tax that is subject to an agreement covered by the International Tax Agreements Act 1953.
The foreign income tax includes taxes similar to Australian withholding tax that is imposed in place of a tax on the net amount of income.
The foreign income tax must be correctly imposed under the relevant foreign law and in accordance with any tax treaty the country has with Australia. For example, if country A is limited under a tax treaty to taxing interest derived in that country by an Australian resident at a rate of up to 10%, but country A imposes a domestic tax rate of 25% for interest derived by all foreign residents, only 10% of the tax counts towards the tax offset. The taxpayer would need to seek a refund of the balance (that is, 15%) from country A’s tax authority.
See Attachment A for a list of countries and other jurisdictions that have a tax treaty with Australia.
The foreign income tax may be imposed at a national, state, provincial, local, municipal or supra-national level; an example of a supra-national tax is that imposed by the European Union on pensions paid to its former employees.
Foreign taxes not included
The following types of foreign tax do not count towards a foreign income tax offset:
- inheritance taxes
- annual wealth taxes
- net worth taxes
- taxes based on production
- credit absorption taxes, that is, a tax that is payable only because the taxpayer or another entity is entitled to a foreign income tax offset in Australia
- unitary taxes, that is, a tax on income, profits or gains of a company derived from sources within the country where the tax is imposed that takes into account income, losses, outgoings or assets of the company (or of an associated company) derived, incurred or situated outside that country, except where the tax only takes those factors into account
- if such an associated company is a resident of the foreign country for the purposes of the law of the foreign country, or
- for the purposes of granting any form of relief for tax imposed on dividends received by one company from another company.
Penalties, fines and interest do not qualify as foreign income tax.
If you are unsure about whether a specific foreign tax is a foreign income tax, you can write to us and request a private binding ruling.