Under the foreign tax credit system, foreign source income derived by Australian residents - apart from certain dividends and listed country branch profits, salary and wages - is generally subjected 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]
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. The Australian resident is entitled to credit for the withholding tax.
Non-portfolio dividends paid to resident corporate taxpayers from the exempting receipts of a controlled foreign company (CFC) do not attract foreign tax credits. [section 23AJ and subsection 160AFC(5A)]
An Australian resident company that receives a dividend from a related foreign company is also allowed a credit for taxes paid by the foreign company on that portion of the profits from which the dividends are paid - that is, the underlying foreign tax. [section 160AFC]