Passive income includes:
- foreign dividends, interest, rental income and royalties
- assessable foreign annuities
- amounts for the assignment of a patent or copyright
- foreign capital gains and passive commodity gains
- attributed foreign income.
If you paid foreign tax in respect of a foreign capital gain, you will need to work out how much of that foreign capital gain is reflected in your net capital gain(for an individual, your net capital gain is the amount shown at A item 17 on your income tax return). This will depend on:
- the amount of the capital gain calculated for Australian Tax purposes
- how you have applied any capital losses and net capital losses from earlier years
- whether any capital gains tax (CGT) concessions apply to the capital gain (for example, the CGT discount or small business concessions).
Capital losses and net capital losses can be applied against capital gains in the order that you choose. To maximise your foreign tax credit entitlement, you may choose to offset losses first against domestic capital gains or foreign gains in respect of which you have not paid tax.
For example, you sell a property that you acquired in January 2000 in a foreign country. Under that country's tax laws, you can make a capital gain of $12,000 and you pay tax in relation to that gain. For Australian tax purposes, your capital gain calculated in accordance with parts 3-1 and 3-3 of the Income Tax Assessment Act 1997(ITAA 1997)is $10,000.
You have made a capital loss of $2,000 in relation to the sale of another property in Australia. You must apply this loss against your foreign capital gain. You then apply the CGT discount to the remaining capital gain. Your net capital gain is $4,000. Because your net capital gain relates entirely to a foreign capital gain in respect of which you have paid foreign tax, this is the amount that is included in working out your passive foreign income.