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Excess foreign tax credits

Last updated 14 May 2020

The consolidation regime (through the single entity rule) ensures that only the head company of a consolidated group includes the foreign income of the consolidated group (or MEC group) in its assessable income.

Once consolidated only the head company can use foreign tax credits to reduce its Australian tax liabilities to avoid double taxation.

The head company can claim a foreign tax credit against Australian tax payable on this income - using its own foreign tax credits, foreign tax credits of subsidiaries and excess foreign tax credits transferred into the group from joining entities.

Generally, the head company can only use those transferred excess credits at the end of the income year after the year the entity joined the group unless the member joins the group at the start of the head company's income year. However, transitional rules apply to groups that consolidated within the transitional period 1 July 2002 to 30 June 2004 to allow such groups ('transitional groups') to use a joining entity's excess foreign tax credits in the joining year, provided certain conditions are met.

Where an entity pays tax on foreign income, while it is a member of a consolidated group (or MEC group), the head company will be assessed on the foreign income and will be taken to have paid and been personally liable for the foreign tax paid by the subsidiary member.

When an entity leaves a consolidated group (or MEC group) it cannot take with it any excess foreign tax credits and it will only include foreign income in its assessable income for the period it is not a member of any consolidated group.

The date of effect of Consolidation and the related provisions regarding excess foreign tax credits is 1 July 2002. These provisions are in the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002.