Resident taxpayers are entitled to a foreign income tax offset for foreign income tax they pay on an amount that is non-assessable non-exempt (NANE) income of the taxpayer under sections 23AI or 23AK of the ITAA 1936.
For more information on how the attribution account rules work in relation to attributable taxpayers with CFC or former foreign investment fund (FIF) interests, refer to chapter 1 and chapter 4 of the Foreign income return form guide.
Only foreign income tax amounts that are paid in respect of income that is NANE under sections 23AI or 23AK count towards a tax offset. Also, the amount of foreign income tax taken to be paid on the distribution is not affected by the tax-paid deeming rules that apply to previously attributed income amounts included in the taxpayer's assessable income.
Usually, the foreign income tax will be a withholding amount on a dividend distribution. In such a case, where the tax is paid by someone else under the law of a foreign country, the tax-paid deeming rules apply to treat the attributable taxpayer as having paid the foreign income tax, providing it can be demonstrated that such tax is paid in respect of the section 23AI or 23AK amounts.
The tax offset limit is increased by the relevant amount of foreign income tax paid in respect of section 23AI or 23AK amounts.
Example
Lynette owns 100% of Forco paid-up capital. She has previously included in her assessable income $1 million in respect of Forco under section 456. Forco subsequently declares and pays a dividend of $1 million to Lynette, on which withholding tax of $100,000 is imposed.
As the dividend amount does not exceed her attribution account surplus in relation to Forco, it is treated as her NANE income under section 23AI. Lynette is also deemed to have paid the $100,000 foreign income tax withheld (which counts towards her tax offset), as it is paid in respect of the dividend income.
Where a resident taxpayer is a partner in a partnership or a beneficiary of an Australian trust with a CFC interest, the partnership or trust is the attributable taxpayer. These entities include, in their net income, the relevant attributed amount under sections 456 or 457. In turn, the partner or beneficiary includes, in their assessable income, their share of the partnership or trust net income that relates to the attributed amount.
However, where a CFC makes a distribution to the partnership or trust out of profits that have been previously subject to attribution, the attribution account rules ensure that the resident partner or beneficiary with an interest in the partnership or trust will get the benefit of section 23AI.
Where a foreign entity that was previously treated as a FIF makes a distribution to an Australian resident out of profits that have been previously subject to attribution, the attribution account rules ensure that the income received by the Australian resident will get the benefit of section 23AK. If the distribution is subject to foreign income tax, the amount of foreign tax paid counts towards a foreign income tax offset.