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