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Working out the credit

Last updated 4 December 2006

Your foreign tax credit entitlement for a class of foreign income is the lesser of:

  • the creditable foreign tax which you have paid on that class of income and
  • the Australian tax payable on that class of income, worked out using the above procedure.

The following example shows the steps to use to work out your foreign tax credit.

Example 4: Working out the foreign tax credit

An individual has:

domestic income

$7,000

passive income - net of foreign tax

$2,000

foreign tax paid - passive income

$200

other income - net of foreign tax

$5,000

foreign tax paid - other income

$1,000

apportionable deductions

$100

Step 1

Work out taxable income

Gross up foreign income by the amount of creditable foreign tax paid:

Assessable passive income (2,000 + 200)

$2,200

Assessable other income (5,000 + 1,000)

$6,000

Taxable income (7,000 + 2200 + 6,000 − 100)

$15,100

Step 2

Work out the average rate (AR) of Australian tax

AR =

gross tax + Medicare levy − rebates ÷ taxable income

 

Gross tax on $15,100

$1,940.00

Medicare levy

$226.50

Rebates

$0

AR = ($1,940 + $226.50 - $0) ÷ $15,100

0.144

Step 3

Work out adjusted net foreign income.

For the passive class of income:

ANFI (passive income) =

(NFI × TI) ÷ (TI + AD)

 

NFI - net foreign passive income

$2,200

TI - taxable income

$15,100

AD - apportionable deductions

$100

ANFI (passive income) = (2,200 × 15,100) ÷ (15,100 + 100) 

$2,185.53

For the other class of income:

NFI - net foreign passive income

$6,000

TI - taxable income

$15,100

AD - apportionable deductions

$100

ANFI (other income) = ($6,000 × $15,100) ÷ ($15,100 + $100)

$5,960.53

Step 4

Work out the Australian tax payable (ATP) on each class of income.

For foreign passive income:

ATP = AR × ANFI (passive income)

ATP = 0.144 × 2,185.53 = 314.72

For foreign other income:

ATP = AR × ANFI (other income)

ATP = 0.144 × 5,960.53 = 858.32

Step 5

Determine allowable foreign tax credit for each class of foreign income.

Foreign tax paid on passive income

$200

Australian tax payable

$314.72

As the foreign tax paid is less than the Australian tax payable, the foreign tax credit is

$200

Foreign tax paid on other income

$1,000

Australian tax payable

$858.32

As the foreign tax paid is more than the Australian tax payable, the foreign tax credit is limited to the extent of the Australian tax payable on the foreign income - that is, $858.32.

The excess credit of $141.68 can be carried forward for offset in later years against Australian tax payable on the same class of foreign income.

End of example

Carry forward of excess foreign tax credits

You will have an excess foreign tax credit for an income year if the amount of foreign tax you have paid is more than the Australian tax payable on that class of foreign income.

You may carry forward an excess foreign tax credit that arises in an income year for a class of foreign income for five years immediately following that income year. Your excess credit for a class of income may only be used where there is a credit shortfall for the same class of income in a later year. A credit shortfall will arise where the credit allowed for a class of foreign income for an income year is less than the Australian tax payable on that class of foreign income.

If you have incurred a loss for a class of foreign income, you cannot claim a tax credit in that year because the Australian tax payable on that class of income is nil. You may, however, carry forward the foreign tax credit relating to that class of income to subsequent years.

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