- you must have actually paid an amount of foreign income tax, and
- the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes
Claiming the offset
If claiming an offset of $1,000 AUD or less, you only need to record the actual amount of foreign income tax paid that counts towards the offset (up to $1,000).
If claiming a foreign income tax offset of more than $1,000 AUD, you must calculate your foreign income tax offset limit. Unfortunately, it may result in your tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to you.
The offset limit is based on a comparison between your tax liability and the tax liability you would have if certain foreign-taxed and foreign-sourced income and related deductions were disregarded.
Step 1
Calculate the income tax payable by you for the tax year. Include Medicare levy and Medicare levy surcharge (if applicable). Exclude any interest/penalties and disregard any tax offsets.
Step 2
Calculate the income tax payable by you for the tax year. Include Medicare levy and Medicare levy surcharge. Exclude any interest/penalties and disregard any tax offsets.
However, you must also disregard the following:
- Assessable Income on which foreign income tax has been paid
- Any other income or gain from a non-Australian source
- Any deductions that are reasonably related to your assessable foreign income
- Any debt deductions attributable to an overseas permanent establishment (rarely applicable)
- Any amount of foreign loss deducted in the income year
Step 3
Take away the result of step 2 from step 1. If the result is greater than $1,000, this is your offset limit.
Paul, an Australian Tax Resident for the year ended 30 June 2020 has the following tax components:
- Employment income from Japan – $10,000
- Employment income from Australia – $20,000
- Interest and dividend income from Australia – $5,000
Total assessable income = $35,000
- Expenses incurred in earning employment income from Japan- $1,000
- Expenses incurred in earning employment income from Australia – $2,000
Total allowable deductions = $3,000
Taxable income = $32,000
- Foreign income tax paid in Japan – $3,000
Step 1: Work out tax payable on Paul’s taxable income
Tax on $32,000 = $3,262 (includes Medicare Levy)
Step 2: Work out Paul’s taxable income disregarding the below components:
- Employment income from Japan – $10,000
- Expenses incurred in earning employment income from Japan- $1,000
Step 2 taxable income = $23,000 (Only Australia sourced income and deductions included)
Tax on $23,000 = $972
Step 3: Take away the result of step 2 from step 1
$3,262-$972= $2,290
This is Paul’s Foreign Income Offset Limit. Even though he paid $3,000 of tax in Japan, the most he can claim is $2,290
You should be aware that:
- The foreign income tax offset is non-refundable (i.e. the amount of the foreign tax credit is limited to the amount of Australian tax payable (including Medicare levy and surcharge)), and any difference is not refunded, nor can it be carried forward to future years.
- You must convert all foreign income, deductions and foreign tax paid to Australian dollars on your Australian income tax return.
Speak to us today
If you have paid foreign tax on your foreign income, it is important to include the figure in your tax return. Your FITO will decrease your tax obligations in Australia, saving you from being double taxed.
Calculating your Foreign Income Tax Offset limit gets confusing so feel free to contact us at Worldwide Accountancy to assist you. Remember we are always here to help you.