• ##### Working out the credit

Warning:

This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

End of attention

Your foreign tax credit entitlement for a class of foreign income is the lesser of:

• the creditable foreign tax which you have paid on that class of income, and
• the Australian tax payable on that class of income, worked out using the above procedure.

The following example shows the steps to use to work out your foreign tax credit.

Example 12: Working out the foreign tax credit

An individual has:

 Domestic income \$7,000 passive income - net of foreign tax \$2,000 foreign tax paid - passive income \$200 other income - net of foreign tax \$5,000 foreign tax paid - other income \$1,000 apportionable deductions \$100

Step 1

Work out taxable income.

Gross up foreign income by the amount of creditable foreign tax paid:

 Assessable passive income (\$2,000 + \$200) \$2,200 Assessable other income (\$5,000 + \$1,000) \$6,000 Taxable income (\$7,000 + \$2,200 + \$6,000 − \$100) \$15,100

Step 2

Work out the average rate (AR) of Australian tax

AR = (gross tax + Medicare levy − rebates) ÷ taxable income

 Gross tax on \$15,100 \$1,940.00 Medicare levy \$226.50 Rebates \$0

AR = (\$1,940 + \$226.50 − \$0) ÷ \$15,100 = 0.144

Step 3

Work out adjusted net foreign income.

For the passive class of income:

ANFI (passive income) = (NFI × TI) ÷ (TI + AD)

 NFI - net foreign passive income \$2,200 TI - taxable income \$15,100 AD - apportionable deductions \$100

ANFI (passive income) = (\$2,200 × \$15,100) ÷ (\$15,100 + \$100) = \$2,185.53

For the other class of income:

 NFI - net foreign passive income \$6,000 TI - taxable income \$15,100 AD - apportionable deductions \$100

ANFI (other income) = (\$6,000 × \$15,100) ÷ (\$15,100 + \$100) = \$5,960.53

Step 4

Work out the Australian tax payable (ATP) on each class of income.

For foreign passive income:

ATP = AR × ANFI (passive income)

ATP = 0.144% × \$2,185.53 = \$314.72

For foreign other income:

ATP = AR × ANFI (other income)

ATP = 0.144% × \$5,960.53 = \$858.32

Step 5

Determine allowable foreign tax credit for each class of foreign income.

 Foreign tax paid on passive income \$200 Australian tax payable \$314.72 As the foreign tax paid is less than the Australian tax payable, the foreign tax credit is \$200 Foreign tax paid on other income \$1,000 Australian tax payable \$858.32

As the foreign tax paid is more than the Australian tax payable, the foreign tax credit is limited to the extent of the Australian tax payable on the foreign income - that is, \$858.32.

The excess credit of \$141.68 can be carried forward for offset in later years against Australian tax payable on the same class of foreign income.

End of example