Overview of the foreign tax credit system



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Under the foreign tax credit system, foreign source income derived by Australian residents - apart from certain dividends and salary and wages - is generally subject to Australian income tax.

A credit for foreign tax paid, up to the amount of the Australian income tax applying to the foreign income, is allowed against the Australian tax payable. Credit is allowable for foreign taxes imposed by central, state and local governments, provided the taxes are equivalent in nature to Australia's income tax. [section 160AF and subsection 6AB(2)]

Resident taxpayers, whether corporate or non-corporate, who include in their assessable income the whole or part of a dividend from a non-resident company are entitled to a credit for the direct foreign tax paid on that dividend. For example, the foreign company may have paid a dividend withholding tax, in which case the Australian resident is entitled to credit for the withholding tax.

Non-portfolio dividends paid to resident corporate taxpayers by a foreign company that are non-assessable non-exempt income do not attract foreign tax credits. [section 23AJ]

Last modified: 01 Jul 2006QC 18507