Using pre-commencement excess foreign income tax
A taxpayer must use pre-commencement excess foreign income tax within five years of the year of income in which the pre-commencement excess foreign income tax arises. For example, any pre-commencement excess foreign income tax that relates to the 2006-07 income year can only be used up to the 2011-12 income year.
The amount used in any one income year cannot exceed the amount by which the foreign tax paid for that year is less than the taxpayer's foreign income tax offset limit. In effect, the taxpayer can top-up the amount of foreign income tax paid to the foreign tax offset limit using pre-commencement excess foreign income tax amounts.
Given the five-year limitation rule, taxpayers should use pre-commencement excess foreign income tax on a first-in first-out basis. For example, a taxpayer with pre-commencement excess foreign income tax relating to both the 2006-07 and 2007-08 income years should use those that relate to the 2006-07 income year first, as they will expire in 2011-12. Any pre-commencement excess foreign income tax that has not been used within the five-year time limit cannot be offset because it has expired.
Example
Austco is an Australian resident company that converts excess foreign tax credits of $5,000 relating to the 2006-07 income year into pre-commencement excess foreign income tax of $5,000 for that income year.
For the 2010-11 income year, Austco pays foreign income tax of $7,000 on income included in its assessable income and calculates its foreign income tax offset limit as $10,000. As the tax offset of $7,000 (before the application of the pre-commencement excess foreign income tax) is less than the tax offset limit of $10,000, Austco can add pre-commencement excess foreign tax of $3,000 to the tax offset for 2010-11.
This leaves $2,000 of unused pre-commencement excess foreign tax.
For the 2011-12 income year, Austco pays foreign income tax of $4,000 on income included in its assessable income and calculates its foreign income tax offset limit as $5,000. As the tax offset of $4,000 (before the application of any pre-commencement excess foreign income tax) is less than the tax offset limit of $5,000, Austco can add pre-commencement excess foreign income tax of $1,000 to the tax offset for 2011-12.
This leaves $1,000 of unused pre-commencement excess foreign income tax.
For the 2012-13 income year, Austco pays foreign income tax of $8,000 on income included in its assessable income and calculates its foreign tax offset limit as $10,000. Although the tax offset of $8,000 (before the application of any pre-commencement excess foreign income tax) is less than the tax offset limit by $2,000, the unused $1,000 of pre-commencement excess foreign income tax cannot be used to increase the tax offset for 2012-13 as it expired in the previous year.
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 the controlled foreign company (CFC) in which you hold an interest.
Specifically, a foreign income tax offset may arise:
- for a resident company that is an attributable taxpayer with a CFC interest and includes an amount in its assessable income under section 456 or 457 of the ITAA 1936
- for resident taxpayers that receive a distribution that is treated as non-assessable non-exempt (NANE) income under section 23AI or 23AK of the ITAA 1936.
In these circumstances, the attributable taxpayer is deemed to have paid foreign income tax in respect of their CFC interest, with the tax paid counting towards their tax offset. In their assessable income, the section 456 and 457 amounts must be grossed up by the amount of the foreign income tax that is deemed to have been paid.
For more information on the tax treatment of attributed income, see Attributed foreign income.