Work out the credit limit for each class of foreign income.
The foreign tax credit that you are entitled to receive is limited to the lesser of:
- the foreign tax you have paid on that class of foreign income and
- the Australian tax payable on that class of foreign income.
The Australian tax payable in relation to a class of foreign income equals:
ANFI × average rate of Australian tax
The amount of credit you are able to claim here may be further limited by a taxation agreement Australia has with the country in which you earned the income. If you received income from a country which has a taxation agreement with Australia and that agreement limits the amount of tax that the foreign country can levy on your income, the amount of foreign tax credit you are allowed is limited to the amount payable under the agreement. If the foreign country has deducted more tax than is permitted under the agreement, you will need to seek a refund of the excess tax from the tax authority of that country.
The tax agreements can be found as Schedules to the International Tax Agreements Act 1953. This Act is available via the ATO's legal database at www.ato.gov.au
For further information, ring the ATO.
For example, if you have a foreign pension or annuity which is taxable in Australia and tax has been taken from the payment by the country that paid it, you may have to claim a refund of that tax rather than a foreign tax credit. This would be the case if tax was deducted from a pension or annuity you received but, because of a tax agreement Australia has with that country, Australia is the only country allowed to tax your pension. Claiming a refund generally involves filling in a special claim form. This is available from the tax authority of the country that paid the pension or annuity. Step 7 of the example will show you how to work out your credit limit.