Albert is an Australian resident and is not married. He previously lived in the United Kingdom and now receives a pension and 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 year and by his Australian employer in Australia for the remainder of the year.
All foreign income, deductions and foreign tax paid must be expressed in Australian dollars. The following table, Translate (convert) to Australian dollars, is an example of how you do this. Phone the Tax Office on 13 28 61 to find out the exchange rates.
Important note: Regulations registered in April 2005 give many taxpayers the choice of using an average exchange rate when translating foreign currency amounts into Australian currency. These regulations generally commence on 1 July 2003.
For more information on converting foreign amounts to Australian dollars refer to the Tax Office fact sheets Translate (conversion) rules.
Below are details of Albert's income, expenses and the foreign tax he paid. All of Albert's foreign income amounts have been converted to Australian dollars.
Gross income |
Amount ($) |
|---|---|
Employment income from Australia |
22,000 |
Employment income from United States |
6,000 |
Pension income from United Kingdom |
4,000 |
Rental income from property in United Kingdom |
1,000 |
Dividend income from United Kingdom |
600 |
Interest income from United Kingdom |
400 |
Total gross income |
34,000 |
Expenses |
Amount ($) |
|---|---|
Medical expenses |
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 an eligible charitable organisation |
200 |
Interest (debt deductions) incurred in deriving dividend income |
70 |
Expenses (debt deductions) incurred in deriving interest income |
30 |
Total expenses |
5,500 |
Foreign tax paid |
Amount ($) |
|---|---|
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 |
$34,000 |
less allowable deductions |
$3,000 |
Taxable income |
$31,000 |
Note: Albert cannot claim a deduction for his 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 |
$5,680 |
Medicare levy payable on taxable income |
$465 |
Total tax and Medicare levy |
$6,145 |
less tax offset for medical expenses |
$200 |
Total tax payable |
$5,945 |
Albert has reduced his tax payable by the medical expenses tax offset he is able to claim. As Albert is not married and his taxable income is less than $50,000, he is 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
($5,945 ÷ $31,000) × (100 ÷ 1) = 19%
Step 4: Work out if Albert has more than one class of foreign income.
Albert has foreign rental income, foreign dividends and foreign interest, which all fall into the passive foreign income class. He also has foreign employment and foreign pension income, which fall into the other foreign income class. As Albert has income from both classes, he will have to do two separate calculations.
Step 5: Work out Albert's net foreign income for each class.
Albert needs to work out the net foreign income for two classes of income-passive foreign income and other foreign income.
Albert's passive foreign income |
Amount ($) |
|---|---|
Gross foreign rental income less expenses |
750 |
Gross foreign dividend income less expenses |
600 |
Gross foreign interest income less expenses |
400 |
Net passive foreign income |
1,750 |
Albert's other foreign income |
Amount ($) |
|---|---|
Gross employment income from the United States less expenses |
5,550 |
Gross pension from 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 donation to a charitable organisation-across both classes of foreign income.
ANFI for Albert's passive foreign income:
1,750 × 31,000 ÷ (31,000 + 200) = 1,739
ANFI for Albert's other foreign income:
9,550 × 31,000 ÷ (31,000 + 200) = 9,489
Step 7: Work out the foreign tax credit limit for each class of foreign income.
Work out the amount of Australian tax payable on each class of foreign income. This is done by multiplying Albert's ANFI-worked out at step 6-by his average rate of Australian tax-worked out at step 3-for each class of income.
Foreign income that has borne foreign tax is eligible for a foreign tax credit. For each class of income the credit is the lesser of the foreign tax paid, or the Australian tax payable ascertained by applying the average rate of Australian tax to the adjusted net foreign income of that class.
Passive foreign income = $1,739 × 19% = $330.41
Other foreign income = $9,489 × 19% = $1,802.91
These are the amounts of Australian tax payable on each class of income.
Albert can claim a tax credit for the lesser of foreign tax paid or Australian tax payable on his foreign income from each class.
Tax payable on his passive foreign income
As Albert paid $400 in foreign tax on this income and this is more than the amount of $330.41 of Australian tax payable, he can claim a foreign tax credit of $330.41. The extra $69.59 of foreign tax that he paid can be carried forward and applied against the Australian tax payable on any passive foreign income he may earn in the next five years.
Tax payable on his other foreign income
As Albert paid $1,800 in foreign tax on this income and this is less than the amount of $1,802.91 of Australian tax payable, he can only claim a credit of $1,800.
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 |
$330.41 |
Tax credit he can claim on his other foreign income |
$1,800.00 |
Total foreign tax credit he can claim |
$2,130.41 |
Step 8: Enter the foreign tax credit amount on Albert's tax return.
Albert would write $2,130.41 at O item 19 on his tax return (supplementary section).
End of example