How to claim a foreign tax credit (current to 30 June 2008)

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About this guide

This document has been archived. It is current only to 30 June 2008.

How to claim a foreign tax credit 2007-08

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About this guide

If you paid foreign tax on income you received from outside Australia, you may be entitled to a foreign tax credit.

This guide shows you how to work out your foreign tax credit if you:

  • paid foreign tax on income you received from outside Australia, and
  • intend to use TaxPack 2008 to fill in your tax return.

This guide applies only to the year ending 30 June 2008.

New rules apply for income years commencing on or after 1 July 2008. For more information about the new rules, refer to Changes to foreign loss quarantining and foreign tax credit calculation rules - Update September 2007 - Fact sheet.

Who should use this guide?

Use this guide if you are an Australian resident individual taxpayer and you paid foreign tax on income you received from outside Australia.

Publications and services

To find out how to get a publication referred to in this guide and for information about our other services, see More information.

Introduction

Who can claim a foreign tax credit?

If you received foreign income that is taxable in Australia and you paid (or are taken to have paid) foreign tax for which you were personally liable on that income, you may be entitled to a foreign tax credit.

You may also be entitled to a foreign tax credit if you received income, or a profit or gain, derived from a source in an area covered by an international tax sharing treaty (for example, the Joint Petroleum Development Area) to the extent that the income or profit or gain is taxed in Australia.

You claim foreign tax credits at item 20 Foreign source income and foreign assets or property on the Tax return for individuals (supplementary section) 2008.

We regularly receive information from foreign tax authorities, under our tax treaties, regarding foreign source income paid to, and the tax withheld from, Australian resident taxpayers. We are making increasing use of information-matching technology to verify the correctness of tax returns. Ensure that all information is fully and correctly declared in your tax return.

What can you claim for?

You can claim a foreign tax credit for:

  • a foreign tax that is similar to Australian income tax or capital gains tax (CGT)
  • foreign withholding taxes similar to Australian withholding taxes on interest, dividends or royalties
  • foreign taxes listed in Australia's double taxation agreements.

Note

You cannot claim a foreign tax credit for penalties, fines or interest.
If you received a foreign pension or annuity that is solely taxable in Australia under a tax treaty and tax has been deducted from the payment by the country that paid it, you need to claim a refund of that tax rather than a foreign tax credit. Claiming a refund generally involves filling in a special claim form, which is available from the tax authority of the country from which the pension or annuity was paid.
The tax treaties can be found as Schedules to the International Tax Agreements Act 1953. This Act is available on our legal database on our website.

If you are not sure whether you can apply for a foreign tax credit, print SCHEDULE OF ADITIONAL INFORMATION - ITEM 20 on the top of a separate piece of paper and explain your situation. Include:

  • your name, address and tax file number (TFN)
  • the precise name of the tax and the country in which it was levied
  • the name of the law under which the tax was imposed
  • whether the tax was levied by a national, state or local authority and the name of the authority, and
  • a description of the tax and why you had to pay it.

Print X in the YES box at question 2a in Taxpayer's declaration on page 8 of your tax return.

Sign and attach your schedule to page 3 of your tax return.

Foreign tax credit for a dividend paid from attributed income

If you received a dividend or other type of distribution that has been wholly or partly paid out of income that was previously attributed to you under the controlled foreign company or foreign investment fund measures, you may also be entitled to a foreign tax credit even though that income may not be taxable. For information on how to calculate the foreign tax credit for distributions received from a controlled foreign company, see the Foreign income return form guide 2007-08 (NAT 1840), available on our website. For distributions received from a foreign investment fund, see the Foreign investment funds guide 2007-08 (NAT 2130), also available on our website.

Credit for foreign taxes paid after your assessment

You are only allowed a foreign tax credit for foreign tax which you have actually paid.

If you do not pay any foreign tax on your foreign income until after you receive your original Australian assessment, you will need to ask for a determination of your foreign tax credit entitlement if you wish to receive a credit.

Your assessment will then be amended to take account of the foreign tax that you paid after you received your original assessment.

What evidence do you need to prove you have paid foreign tax?

You will need written evidence of payment of foreign tax, such as:

  • a notice of assessment from the foreign tax authority and a receipt for the tax paid
  • a statement from the foreign tax authority setting out the particulars that would normally be recorded on a notice of assessment and a receipt for payment, or
  • a certificate for deduction of withholding tax issued by the person who pays the interest, dividend or any other income that is subject to foreign tax.

Keep the evidence with your other records. You may need to produce it later.

How to work out your foreign tax credit

The following steps will help you to work out your foreign tax credit. An example is shown in this guide.

Do you have assessable foreign income and have you shown exempt foreign employment income at N item 20 on your tax return (supplementary section)?

NO Go to step 1.

YES You will not be able to work out your foreign tax credit using this guide. We will work out your foreign tax credit for you from the information you provide below.

If this is the case, print SCHEDULE OF ADDITIONAL INFORMATION - ITEM 20 on the top of a separate piece of paper and explain your situation. Include:

  • your name, address and TFN
  • each type and amount of foreign income you received, and
  • any foreign tax paid on each type of foreign income.

Print X in the YES box at question 2a in Taxpayer's declaration on page 8 of your tax return.

Sign and attach your schedule to page 3 of your tax return.

Step 1 Work out your taxable income.

You need to fill in the rest of your tax return before you can do this. Your taxable income is the amount at $ TAXABLE INCOME OR LOSS on page 3 of your tax return.

Step 2 Work out the amount of gross tax, Medicare levy and, if applicable, Medicare levy surcharge (MLS) payable on your taxable income.

See the calculation pages in TaxPack 2008.

Step 3 Work out the average rate of Australian tax payable on your taxable income.

Use the following formula:

Average rate of tax

=

gross tax + Medicare levy + MLS - qualifying tax offsets

taxable income

The qualifying tax offsets you can use to work out your average rate of Australian tax are:

  • spouse, child-housekeeper or housekeeper
  • overseas forces or zone
  • medical expenses
  • invalid relative
  • parent or spouse's parent
  • certain low income taxpayers.

A description of these offsets is in TaxPack 2008 and TaxPack 2008 supplement. Step 3 of the example shows you how to work out your average rate of Australian tax.

Step 4 Work out whether you have assessable foreign income from more than one class.

Assessable foreign income is divided into three classes for the purpose of claiming a foreign tax credit. The amount of your assessable foreign income is the amount before any foreign tax is deducted.

These classes are:

  • passive foreign income
  • lump sum payments from foreign superannuation funds that are taxed under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)
  • other foreign income.

Most taxpayers will have only passive foreign income and other foreign income.

What is passive foreign income?

Passive foreign 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
  • income attributed from a controlled foreign company, foreign investment fund or transferor trust.

What are foreign capital gains?

If you paid foreign tax in respect of a foreign capital gain, you 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 18 on your tax return (supplementary section). The amount of a foreign capital gain reflected in your net capital gain will depend on:

  • the amount of the capital gain calculated for Australian tax purposes
  • how you have applied any capital losses from the current year, and net capital losses from earlier years, and
  • whether any CGT concessions apply to the capital gain (for example, the CGT discount or small business concessions).

For further information, refer to the Guide to capital gains tax 2008 (NAT 4151).

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 can apply capital losses first against domestic capital gains or foreign capital gains in respect of which you have not paid tax.

If you are claiming a foreign tax credit in respect of a foreign capital gain, include a note on your tax return that specifies the amount of the foreign capital gain included in your net capital gain.

Example

You sold a property that you acquired in January 2000 in a foreign country. Under that country's tax laws, you made a capital gain of $12,000 and you paid foreign tax in respect of that gain. For Australian tax purposes, your capital gain calculated in accordance with Parts 3-1 and 3-3 of the ITAA 1997 is $10,000.
You also sold a property in Australia and made a capital loss of $3,000 on that sale. You must apply this loss against your foreign capital gain of $10,000. As an individual who owned the foreign property for at least 12 months, you then apply the 50% CGT discount to the remaining capital gain of $7,000, which gives you a net capital gain of $3,500. 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 ($3,500) that is included in working out your passive foreign income.

What are lump sum payments from foreign superannuation funds?

Certain lump sum payments made from foreign superannuation funds are subject to special tax rules under section 305-70 of the ITAA 1997. These payments form their own class of foreign income.

What is other foreign income?

Other foreign income is foreign income that does not fit into either of the other classes of income. It includes income from commercial activities, and salary or wages that are not exempt.

Step 5 Work out your net income for each class of foreign income.

Net foreign income is the amount of your assessable foreign income of each class, less the following deductions:

  • expenses directly related to that class of foreign income other than relevant debt deductions (see What is a relevant debt deduction?)
  • any domestic tax loss carried forward from a previous income year that you have elected to deduct from your foreign income, and
  • other deductions appropriately related to that class of foreign income (other than relevant debt deductions).

What is a debt deduction?

Debt deductions are, broadly, deductible costs incurred in obtaining or maintaining debt finance. The term is defined in section 820-40 of the ITAA 1997. Examples of debt deductions are interest, amounts in the nature of interest and fees or charges in respect of debt finance.

What is a relevant debt deduction?

A relevant debt deduction is a debt deduction to the extent that it is not attributable to any of the taxpayer's overseas permanent establishments.

The example shows you how to work out your net income for each class of foreign income.

Step 6 Work out your adjusted net foreign income (ANFI) for each class of foreign income.

This involves allocating to each class of foreign income any apportionable deductions that you are able to claim. Apportionable deductions are those deductions of a concessional nature which do not relate directly to income-producing activities - for example, gifts to deductible gift recipients (DGR).

If you do not have any apportionable deductions, your ANFI for each class will equal your net foreign income of that class.

If you do have apportionable deductions, there are three methods for working out the ANFI. If your net foreign income (of all classes) is less than or equal to the sum of your taxable income and apportionable deductions, as is most often the case, the ANFI for each class of foreign income equals:

net foreign income

X

              taxable income              

taxable income + apportionable deductions

The other methods of working out the ANFI are:

  • If your net foreign income consists of one class of income and the amount exceeds the sum of your taxable income plus apportionable deductions, your ANFI will equal your taxable income.

     
  • If your net foreign income consists of two or more classes of income and your combined net foreign income from all classes exceeds the sum of your taxable income plus apportionable deductions, your ANFI for each class will equal your taxable income divided proportionately into each class of foreign income.

Step 7 Work out your foreign tax credit limit for each class of foreign income.

The foreign tax credit to which you are entitled 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 X average rate of Australian tax

The amount of credit you are able to claim in Australia may be further limited by tax treaties Australia has with the country from which you derived the income. If you received income from a country that has a tax treaty with Australia and that treaty 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 treaty. If the foreign country has deducted more tax than is permitted under the treaty, you will need to seek a refund of the excess tax from the tax authority of that country. The tax treaties can be found as Schedules to the International Tax Agreements Act 1953. This Act is available on our legal database on our website.

Step 7 of the example shows you how to work out your foreign tax credit limit.

For more information, phone us on 13 28 61.

Step 8 Enter your foreign tax credit amount on your tax return.

Add up the amount of foreign tax credit you are entitled to claim for each class - from step 7 - and insert the total at O item 20 on your tax return (supplementary section).

Carrying excess foreign tax credits forward

The following relates to amounts carried forward to the 2008 income year. For amounts to be carried forward from the 2008 income year, the new rules will apply.

You will have an excess foreign tax credit for an income year if the amount of foreign tax you have paid in respect of a class of foreign income exceeds the Australian tax payable on that class of foreign income.

You may carry forward an excess foreign tax credit for the five income years immediately following the income year in which it arose. You may use an excess credit for a class of foreign income only if there is a credit shortfall for the same class of foreign income in a later year. A credit shortfall occurs if the credit allowed for a class of income is less than the Australian tax payable on that class of income.

If you incur a loss for a class of foreign income, you cannot claim a foreign tax credit for that class of income in that income year because the Australian tax payable for that class is nil. You may, however, carry forward the foreign tax credit to a later income year to apply to the same class of foreign income.

You are required to keep your own records of your excess foreign tax credits if you are carrying the credits forward to a later date.

An example to help you work out your foreign tax credit

Albert was an Australian resident for the whole income year and had no spouse or dependents. He previously lived in the United Kingdom and now receives dividend, interest and rental income from the United Kingdom. Albert worked for, and was paid by, an American company in the United States for 80 days during the income year. He also worked for an Australian employer in the United Kingdom for a short period and worked in Australia for the remainder of the income year.

All foreign income, deductions and foreign tax paid must be expressed in Australian dollars. The following table shows you how to do this. Phone us on 13 28 61 to find out the exchange rates.

Table: Convert to Australian dollars

Type of foreign amount

Convert foreign amount to Australian dollars at:

Foreign employment income, pensions and annuities

the exchange rate that applied at the time you were paid or had the income applied or dealt with on your behalf or as you directed (such as into a bank account), even if no amount was remitted to Australia.

Foreign business income and other income such as dividends and interest

the exchange rate that applied at the earlier of when you received or derived the income

for statutory income, the earlier of when you received the income or were first required to include it in your assessable income.

Foreign capital gains

the exchange rate that applied at the time of the transaction or event for each transaction or event involving an amount of foreign currency (or the market value of property expressed in a foreign currency). For example, if an amount included in the cost base of an asset is expressed in foreign currency, convert that amount into Australian currency on the date that the expenditure was incurred. Convert capital proceeds on the date of the CGT event.

Foreign tax paid

the exchange rate that applied at the time the foreign tax was paid.

Foreign deductions (other than capital allowances)

the exchange rate applicable at the earlier of when the amount was paid or when it became deductible.

Cost of a depreciating asset

the exchange rate that applied at the earlier of when you:

  • began to hold the asset, or
  • paid for it (that is, satisfied your obligations for it).

From 1 July 2003, amounts in foreign currency must be converted into Australian currency for taxation purposes at the exchange rates prevailing at specific times as shown in the table in the previous column. However, regulations made in April 2005 may allow you to choose to use an average exchange rate when converting foreign currency amounts into Australian dollars. The regulations allow the use of average rates to have effect from 1 July 2003.

You may choose to use an average exchange rate only where it gives a reasonable approximation of exchange rates that would otherwise be applicable using the rules in the above table.

For more information on the translation of foreign currency amounts to Australian dollars, see the fact sheets Foreign exchange (forex): the general translation rule (NAT 9339) and Foreign exchange (forex): general information on average rates (NAT 13434), available on our website.

Below are details of Albert's income, expenses and the foreign tax he paid. All Albert's foreign income amounts have been converted to Australian dollars.

Gross income

$

Employment income from Australia

42,000

Employment income from United States

6,000

Employment income from United Kingdom

4,000

Rental income from property in United Kingdom

1,000

Dividend income from United Kingdom

600

Interest income from United Kingdom

400

Total gross income

54,000

Expenses

$

Medical expenses, after deducting refunds

2,500

Expenses incurred in deriving employment income from Australia

2,000

Expenses incurred in deriving employment income from United States

450

Expenses incurred in deriving rental income from United Kingdom

250

Gift to a DGR

200

Interest (debt deductions) incurred in deriving dividend income from United Kingdom

70

Expenses (debt deductions) incurred in deriving interest income from United Kingdom

30

Total expenses

5,500

Foreign tax paid

$

Employment income from United States

1,800

Dividend income from United Kingdom

60

Interest income from United Kingdom

40

Rental income from United Kingdom

300

Total foreign tax paid

2,200

Example: Working out Albert's foreign tax credit

 
Step 1 Work out Albert's taxable income.
 

$

Assessable income

54,000

less allowable deductions*

3,000

Taxable income

51,000

*Albert cannot claim a deduction for his $2,500 of medical expenses but he can claim a tax offset for them for amounts above $1,500. He does this at step 2.
Step 2: Work out Albert's tax and Medicare levy.
 

$

Tax payable on taxable income

9,900

Medicare levy payable on taxable income

($51,000 x 1.5%)

765

Total tax and Medicare levy

10,665

less tax offset for medical expenses

($2,500 - $1,500) x 20%

200

Total tax payable

4,915

The tax offset for medical expenses reduces Albert's tax payable. Albert has private patient hospital cover and is therefore not liable for the Medicare levy surcharge. Step 3: Work out the average rate of tax payable on Albert's taxable income.
Albert's average rate of Australian tax:

=

  10,465  

  51,000

x

100

1

=

20.5196%

  
Step 4: Work out whether Albert has more than one class of foreign income.
Albert has foreign rental income, foreign dividends and foreign interest, which fall into the passive foreign income class. He also has foreign employment income (from the Unites States and the United Kingdom), which fall into the other foreign income class. As Albert has income from two classes, he will have to do two separate calculations.
Step 5: Work out Albert's net foreign income for each class.
Albert needs to work out the net foreign income for two classes of income - passive foreign income and other foreign income.
Albert's passive foreign income
 

$

Gross foreign rental income less expenses

($1,000 - $250)

750

Gross foreign dividend income less expenses (other than relevant debt deductions)

600

Gross foreign interest income less expenses (other than relevant debt deductions)

400

Net passive foreign income

1,750

 
Albert's other foreign income
 

$

Gross employment income from the United States less expenses ($6,000 - $450)

5,550

Gross employment income from the

United Kingdom

4,000

Net other foreign income

9,550

Step 6: Work out Albert's adjusted net foreign income (ANFI) for each class.
This involves allocating the apportionable deduction - a $200 gift to a DGR - across both classes of foreign income.
ANFI for Albert's passive foreign income:

=

1,750

x

     51,000     

51,000 + 200

=

1,743

  
ANFI for Albert's other foreign income:

=

9,550

x

     51,000    

51,000 + 200

=

9,513

  
Step 7: Work out the foreign tax credit limit for each class of foreign income.
For each class of foreign income, the credit is the lesser of the foreign tax paid and the Australian tax payable.
Therefore, Albert needs to work out the Australian tax payable on his foreign income from each class. Albert multiplies his ANFI - worked out at step 6 - by his average rate of Australian tax - worked out at step 3 - for each class of income.

Passive foreign income:

$1,743 

x

20.5196%

=

$357.66

Other foreign income:

$9,513 

x

20.5196%

=

$1,952.03

Tax payable on his passive foreign income
As Albert paid $400 in foreign tax on his passive foreign income and this is more than the amount of $357.66 of Australian tax payable, he can claim a foreign tax credit of $357.66. The extra $42.34 of foreign tax that he paid may be carried forward and applied against the Australian tax payable on foreign income he may derive in the next five income years. Note that this carry forward amount is subject to the new rules that apply to income years commencing on or after 1 July 2008. For more information refer to Changes to foreign loss quarantining and foreign tax credit calculation rules - Update September 2007 - Fact sheet.
Tax payable on his other foreign income
As Albert paid $1,800 in foreign tax on his other foreign income and this is less than the amount of $1,952.03 of Australian tax payable, he can only claim a credit of $1,800.00. The extra $296.00 of foreign tax that he paid can be carried forward and applied against the Australian tax payable on any other foreign income he may earn in the next five years.
Albert must now add the amount of tax credit he can claim on his passive foreign income to the tax credit he can claim on his other foreign income.
 

$

Tax credit Albert can claim on his passive foreign income

357.66

Tax credit he can claim on his other foreign income

1,800.00

Total foreign tax credit he can claim

2,157.66

Step 8: Enter the foreign tax credit amount on Albert's tax return.
Albert would write $2,157.66 at O item 20 on his tax return (supplementary section).

More information

Internet

  • For general tax information and up-to-date and comprehensive information about deductions visit www.ato.gov.au

Publications

Publications referred to in this guide are:

To get any publication referred to in this guide:

  • visit our website at www.ato.gov.au/publications for publications, taxation rulings, practice statements and forms
  • phone our Publications Distribution Service on 1300 720 092, or
  • visit one of our shopfronts.

Infolines

We can offer a more personalised service if you provide your tax file number (TFN).

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  • Superannuation 13 10 20

     
  • Fax 13 28 60

    Get information faxed to you about individual taxes and the repayment of debts under the Higher Education Loan Programme (HELP) and the Student Financial Supplement Scheme (SFSS). Note that debts under the former Higher Education Contribution Scheme (HECS) have now been added to any debt under HELP to become one accumulated HELP debt. Phone 13 28 60 and follow the instructions to order information to be faxed to you.

Other services

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For 1800 free call numbers, phone 1800 555 727 and ask for the number you want.

Lodge online using e-tax

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  • For more information, visit our website at www.ato.gov.au

Feedback

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As this is a publications area only, any tax matters will be passed on to a technical area; alternatively, you can phone our Personal Infoline on 13 28 61 for help.

Our commitment to you

We are committed to providing you with guidance you can rely on, so we make every effort to ensure that our publications are correct.

If you follow our guidance in this publication and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we must still apply the law correctly. If that means you owe us money, we must ask you to pay it but we will not charge you a penalty. Also, if you acted reasonably and in good faith we will not charge you interest.

If you make an honest mistake in trying to follow our guidance in this publication and you owe us money as a result, we will not charge you a penalty. However, we will ask you to pay the money, and we may also charge you interest.

If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to. If you feel this publication does not fully cover your circumstances, or you are unsure how it applies to you, you can seek further assistance from us.

We regularly revise our publications to take account of any changes to the law, so make sure that you have the latest information. If you are unsure, you can check for a more recent version on our website at www.ato.gov.au or contact us.

This publication was current at May 2008.

How self-assessment affects you

Self-assessment means the Tax Office uses the information you give on your tax return and any related schedules and forms to work out your refund or tax liability. We do not take any responsibility for checking the accuracy of the details you provide, although our system automatically checks the arithmetic.

Although we do not check the accuracy of your tax return at the time of processing, at a later date we may examine the details more thoroughly by reviewing specific parts, or by conducting an audit of your tax affairs. We also have a number of audit programs that are designed to continually check for missing, inaccurate or incomplete information.

What are your responsibilities?

It is your responsibility to lodge a tax return that is signed, complete and correct. Even if someone else - including a tax agent - helps you to prepare your tax return and any related schedules, you are still legally responsible for the accuracy of your information.

What if you lodge an incorrect tax return?

If you become aware that your tax return is incorrect, you must contact us straight away.

Initiatives to complement self-assessment

There are a number of systems and entitlements that complement self-assessment, including:

  • the private ruling system
  • the amendment system (if you find you have left something out of your tax return)
  • your entitlement to interest on early payment or over-payment of a tax debt.

Do you need to ask for a private ruling?

If you are uncertain about how a tax law applies to your personal tax affairs, you can ask for a private ruling. To do this, complete a Private ruling application form (not for tax professionals) (NAT 13742), or contact us.

Lodge your tax return by the due date, even if you are waiting for the response to your application. You may need to request an amendment to your tax return once you have received the private ruling.

We publish all private rulings on our website. (Before we publish we edit the text to remove information that would identify you.)

Last Modified: Monday, 30 June 2008




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ATO references:
NO NAT 1840

How to claim a foreign tax credit (current to 30 June 2008)
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