# Example: Working out Albert's foreign tax credit

Last updated 16 March 2007

## Step 1 Work out Albert's taxable income

 Assessable income \$34,000 less allowable deductions \$3,000 Taxable income \$31,000

Albert cannot claim a deduction for his medical expenses but he can claim a tax offset for them for amounts above \$1,250. He does this at step 2.

## Step 2 Work out the tax and Medicare levy Albert must pay on his taxable income

 Tax payable on taxable income \$5,680 Medicare levy payable on taxable income(\$31 000 × 1.5%) \$465 Total tax and Medicare levy \$6,145 less rebate for medical expenses(\$2,500 − \$1,250) ÷ 5 \$250 Total tax payable \$5,895

Albert has reduced his tax payable by the medical expenses he is able to claim. As Albert is unmarried and his taxable income is less than \$50,000, he is 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

(\$5,895 ÷ \$31,000) × (100 ÷ 1) = 19.0%

## Step 4 Work out if Albert has more than one class of foreign income

Albert has foreign rental income, foreign dividends and foreign interest which all fall into the passive foreign income class. He also has foreign employment and foreign pension income which fall into the other foreign income class of income.

As Albert has income from both classes, he will have to do 2 separate calculations.

## Step 5 Work out Albert's net foreign income for each class

Albert needs to work out the net foreign income for 2 classes of income-passive and other foreign income.

 Gross foreign rental income less expenses(\$1,000 − \$250) \$750 Gross foreign dividend income less expenses (\$600) \$600 Gross foreign interest income less expenses (other than relevant debt deductions) (\$400) \$400 Net passive foreign income \$1,750
 Gross employment income from the United States less expenses (\$6,000 − \$450) \$5,550 Gross pension from the United Kingdom \$4,000 Net other foreign income \$9,550

## Step 6 Work out the ANFI for each class

This involves allocating the apportionable deduction-a \$200 donation to a charitable organisation-across both classes of foreign income.

ANFI for Albert's passive foreign income

\$1,750 × (\$31,000 ÷ [\$31,000 + \$200]) = \$1,739

ANFI for Albert's other foreign income:

\$9,550 × (\$31,000 ÷ [\$31,000 + \$200]) = \$9,489

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

Work out the amount of Australian tax payable on each class of foreign income. This is done by multiplying Albert's 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 = \$1,739 × 19.0% = \$330.41

Other foreign income = \$9,489 × 19.0% = \$1,802.91

These are the amounts of Australian tax payable on each class of income.

Albert can claim a tax credit for the lesser of foreign tax paid or Australian tax payable on his foreign income from each class.

### Tax payable on his passive foreign income

As Albert paid \$400 in foreign tax on this income and this is more than the amount of \$330.41 of Australian tax payable, he can claim a foreign tax credit of \$330.41. The extra \$69.59 of foreign tax that he paid can be carried forward and applied against the Australian tax payable on any passive foreign income he may earn in the next 5 years.

### Tax payable on his other foreign income

As Albert paid \$1,800 in foreign tax on this income and this is less than the amount of \$1,802.91 of Australian tax payable, he can only claim a credit of \$1,800.

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 \$330.41 Tax credit he can claim on his other foreign income \$1,800.00 Total foreign tax credit he can claim \$2,130.41

## Step 8 Note the amount of tax credit that Albert can claim on his tax return

Albert would write \$2,130.41 at O item 19 on his tax return.

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