Overview
If you have assessable income from overseas, you must declare it in your Australian income tax return. If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation.
Different rules apply for income periods up to 30 June 2008 (refer to How to claim a foreign tax credit, NAT 2338).
You can claim a tax offset for the foreign tax you have paid on income or gains (including gains of a capital nature), that are included in your assessable income. In some circumstances, the offset is subject to a limit.
To be entitled to a foreign income tax offset:
- you must have actually paid an amount of foreign income tax
- the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes.
Differences between the Australian and foreign tax systems may lead to you paying foreign income tax in a different income year from that in which the income or gain is included in your assessable income for Australian income tax purposes. You could have paid the foreign tax in an earlier or later income year. However, the offset can only be claimed after the foreign tax is paid.
If you paid foreign income tax after the year in which the related income or gains have been included in your Australian tax return, you can claim the offset by lodging an amended assessment for that year. You have up to four years to request an amendment to your assessment from the date you paid the foreign income tax or there was an increase or reduction in the amount of foreign income tax you paid that counts towards the offset.
The foreign income tax offset applies to foreign income tax imposed on all forms of income, profits and gains, (including gains of a capital nature) and all taxpayers, whether individuals or other entity types.
Note that:
- while the offset mainly applies to Australian resident taxpayers, in the limited circumstances where the foreign income of a foreign person or non-resident is taxed as assessable income in Australia, they may be able to claim the offset
- in very limited circumstances, foreign tax imposed on Australian source income may count towards a foreign income tax offset.
For a comparison of the foreign income tax offset rules and the foreign tax credit rules, refer to Changes to foreign loss quarantining and foreign tax credit calculation rules - overview.
Calculating the offset
You claim the foreign income tax offset in your income tax return.
If claiming an offset of $1,000 or less, you only need to record the actual amount of foreign income tax paid on your assessable income (up to $1,000).
If claiming a foreign income tax offset of more than $1,000, you will first need to work out your foreign income tax offset limit.
Before you calculate your net income, you must convert all foreign income deductions and foreign tax paid to Australian dollars - refer to Converting foreign income to Australian dollars.
Unlike the previous system of foreign tax credits (applying up to 30 June 2008), you no longer have to quarantine your foreign income into separate classes to work out the amount of the offset. All types of income are treated the same for the purposes of working out the foreign income tax offset.
For a comparison of the foreign income tax offset rules and the foreign tax credit rules, refer to Changes to foreign loss quarantining and foreign tax credit calculation rules - overview.
Record keeping
To claim a foreign income tax offset, you will need to keep adequate records of your foreign income and tax paid.
Transitional rules
Any excess amount of foreign tax that cannot be recouped as an offset in an income year cannot be carried forward (unlike the previous system of foreign tax credits). However, transitional rules enable a taxpayer with pre-existing excess foreign tax credits to use some of these amounts in certain circumstances.
Attributed foreign income
If you have interests in a foreign entity, your share of its income may be attributed to you for income tax purposes, even if the income has not yet been distributed.
If you have attributed foreign income, you may be entitled to a foreign income tax offset for foreign income tax, income tax, or withholding tax paid by a controlled foreign company (CFC) or foreign investment fund (FIF) in which you hold an interest. The treatment of attributed foreign income under the foreign income tax offsets system is simpler than under the previous foreign credits system. Also, attributable taxpayers will no longer need to maintain attributed tax accounts.
For more information on the tax treatment of attributed income, refer to the publication Attributed foreign income.
Legislation and related measures
The foreign income tax offset system was introduced by the Tax Laws Amendment (2007 Measures No. 4) Act 2007, and replaces the foreign tax credit rules in former Divisions 18, 18A and 19 of the ITAA 1936.
The foreign income tax offset rules apply to income years starting on or after 1 July 2008. For most taxpayers, that means it will apply to their 2008-09 income year onwards. However, for taxpayers with substituted accounting periods that have early balancing dates (in lieu of 30 June), the rules will not apply until their 2009-10 income year.
The amending Act also repealed the quarantining of foreign losses, which are no longer quarantined according to particular classes of foreign assessable income, or quarantined against other income. There are also transitional rules that permit certain pre-existing foreign losses of a taxpayer to be converted into an ordinary tax loss and deducted against a taxpayer's assessable income, subject to an annual deduction limit.
For more information on the repeal of the foreign loss quarantining rules and the transitional rules, refer to the Foreign income tax return form guide 2008-09. More detailed information on the treatment of foreign losses is contained in the 2009 Losses schedule instructions and the 2009 Consolidated groups losses schedule instructions.