Guide to foreign income tax offset rules 2024
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Calculate your FITO or offset limit
Calculate your FITO or offset limit
How to work out your FITO or offset limit.
On this page
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- About the FITO limit
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- FITO up to $1000
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- FITO more than $1000
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- Joint Petroleum Development Area income and FITO
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- Claiming your FITO
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- How to calculate your offset limit
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- Special amendment rules for foreign income tax offsets
You claim the FITO in your tax return. First check if the amount you claim is subject to a foreign income tax offset limit.
As a non-refundable tax offset, the foreign income tax offset reduces your income tax payable (including Medicare levy and Medicare levy surcharge).
Under the tax offset ordering rules, the foreign income tax offset is applied after all other non-refundable tax and non-transferable offsets. Once your tax payable has been reduced to nil, any unused foreign income tax offset is not refunded to you and can't be carried forward to later income years.
To claim a foreign income tax offset of up to $1,000, you only need to record the actual amount of foreign income tax paid that counts towards the offset (up to $1,000).
If you are claiming a foreign income tax offset of more than $1,000, you have to work out your foreign income tax offset limit . This 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.
Joint Petroleum Development Area income and FITO
For Australian resident individuals with Joint Petroleum Development Area (JPDA) income, the foreign income tax offset for an employee is the lesser of:
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- Australian tax payable on the net assessable JPDA income (JPDA income less allowable deductions relating to that income)
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- Timor-Leste tax paid on JPDA employment income.
The foreign income tax offset limit does not apply to this income.
If you paid foreign income tax after the year in which the related income or gains have been included in your assessable income, you may amend your assessment for that year to claim the offset.
You claim the foreign income tax offset in your income tax return. For help completing that part of the income tax return, see:
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- Individuals - Individual tax return instructions supplement 2024
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- Companies - Company tax return instructions 2024
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- Partnerships - Partnership tax return instructions 2024
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- Trusts - Trust tax return instructions 2024
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- Funds - Fund income tax return instructions 2024
Before you calculate your net income, you must convert all foreign income, deductions and foreign tax paid to Australian dollars.
How to calculate your offset limit
If you are claiming a foreign income tax offset of more than $1,000, you will first need to work out your foreign income tax offset limit. See Example 16: Foreign income tax offset limit. 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: Work out your income tax payable
Work out the income tax payable by you (including Medicare levy and Medicare levy surcharge) for 2023-24, excluding penalties and interest and disregarding any tax offsets.
Step 2: Work out your income tax that would be payable if you disregarded certain foreign income and related deductions
Work out the income tax that would be payable by you (including Medicare levy and Medicare levy surcharge) excluding penalties and interest and disregarding any tax offsets, if the following assumptions were made:
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- your assessable income didn't include
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- any amount on which foreign income tax has been paid that counts towards your foreign income tax offset
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- any other income or gains from a non-Australian source
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- you were not entitled to the following (where such deductions are actually allowable)
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- debt deductions attributable to your overseas permanent establishment
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- any other deductions (other than debt deductions) that are reasonably related to any amount covered by the first dot point above about assessable income
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- an amount of the foreign loss component of one or more tax losses deducted in the income year.
For the purpose of this step, where deductions relate exclusively to the disregarded income amounts, you should assume that you were not entitled to the deductions.
Whether a deduction is reasonably related to the disregarded assessable income amounts will be a question of fact depending on the circumstances of the taxpayer. The meaning of 'reasonably related to' is broad and it includes a relationship that may either be direct or indirect, provided that the relationship consists of a real connection. However, a merely remote relationship is insufficient.
Where deductions relate to both disregarded income amounts and other assessable income (as would typically be the case with head office and general administration expenses) you will need to apportion the deductions on a reasonable basis.
Allowable deductions for items such as gifts, contributions, superannuation and tax agent's fees are not considered to be reasonably related to any amount on which foreign income tax has been paid or other non-Australian source income.
Where foreign income is subject to averaging (for example, where the special professional income rules or primary production income rules apply) only the foreign income for the current year is excluded at this step. It is not necessary to separate the Australian and foreign amounts for prior years.
Step 3: Work out the foreign income tax offset limit
Subtract the result of step 2 from step 1. If the result is greater than $1,000, this is your offset limit.
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Example 16: foreign income tax offset limit
Anna, an Australian-resident taxpayer for the year ended 30 June 2024, has income and expenses and pays foreign income tax for the income year as follows: Example of income and deductions
Foreign income tax paid
Anna calculates her foreign income tax offset limit as follows: Step 1: Work out the tax payable on her taxable income
Step 2: Work out the tax that would be payable if:
Foreign income amounts
Expenses
Note: The debt deductions of $100 ($70 + $30) that relate to the United Kingdom dividend and interest income are not disregarded, as Anna does not have an overseas permanent establishment. Nor is the deduction of $70 for the gift to a deductible gift recipient disregarded, as it does not reasonably relate to the excluded assessable income amounts at step 2(a). Calculation
Tax on $19,830: $309.70 As $19,830 is below the Medicare low income threshold, the Medicare levy is not applied. Step 3: Subtract the result of step 2 from step 1
This is Anna's foreign income tax offset limit. Although she has paid foreign income tax of $3,400, her foreign income tax offset is limited to $2,769.60. The difference between the foreign income tax that Anna has paid and the offset limit cannot be refunded or carried forward to a future income year. |
Offset limit deferred non-commercial business losses
If a current year foreign business loss is required to be deferred because of the non-commercial business loss rules , then step 2 in the foreign income tax offset limit calculation needs to be adjusted for the amount of any foreign business loss that is deferred. This is done before working out the amount of foreign income and expenses to be disregarded.
To be eligible for the foreign income tax offset where you have a net foreign business loss there must be other foreign income included in assessable income on which foreign income tax has been paid.
To work out the amount of foreign income and expenses to disregard at step 2:
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- add back the foreign component of the current year deferred non-commercial business loss to the net foreign income amount
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- then subtract the net foreign income from taxable income.
If the net foreign amount is zero or negative after adding back the deferred foreign loss component, then the foreign income tax offset amount will be the lower of the foreign income tax paid or the default foreign income tax offset limit amount of $1,000.
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Example 17: foreign income tax offset limit - deferred non-commercial business losses
Assume for the year ended 30 June 2024 that Karen has:
Also assume that the current year loss is required to be deferred as it does not meet one of the 4 non-commercial losses tests. There is also $20,000 of other foreign income on which foreign income tax of $2,000 has been paid. The net foreign income is: ($20,000 - $3000) = $17,000 Add the foreign component of deferred loss back to the net foreign income and then subtract the adjusted net foreign income amount from taxable income:
Step 1: Work out the tax payable on her taxable income Tax on $80,000: $18,067 (includes Medicare levy) Step 2: Work out the tax that would be payable based on the stated assumptions Taxable income under step 2 assumptions: $60,000 Tax on $60,000: $11,167 (includes Medicare levy) Step 3: Subtract the result of step 2 from step 1 $18,067 - $11,167 = $6,900 In this situation, all the foreign income tax of $2,000 would be available as a tax offset as the foreign income tax offset limit exceeds the foreign income tax paid. |
Special amendment rules for foreign income tax offsets
Differences between the Australian and foreign tax systems may lead to you paying foreign income tax in a different income year to that in which you include the related income or gains in your income for Australian income tax purposes.
If you paid foreign income tax after the year in which the related income or gains have been included in your income, you can amend your assessment for that year to claim the offset. You can lodge an amended assessment within 4 years of paying foreign income tax that counts towards your tax offset. This time period applies irrespective of when the income or gains were included in your income for Australian income tax purposes. In this situation, the foreign income tax must be paid after you have lodged your Australian income tax return for the relevant year.
The 4-year amendment period also applies where there has been an increase or decrease in the amount of foreign income tax paid that counts towards your tax offset. The special amendment rules also apply to amendments initiated by us, which may have the effect of extending the normal period of review . In these cases, the 4 year period starts when the increase in foreign income tax has been paid or when the foreign income tax has been reduced, for example, by a refund.
The special amendment rules apply only where you have paid foreign income tax or there has been an increase or decrease in the tax paid that counts towards your tax offset. In all other circumstances, the normal amendment rules apply.
For example, where an audit by us has detected an incorrect calculation of the foreign income tax offset limit affecting the amount of the foreign income tax offset previously claimed, we can only amend a taxpayer's assessment within the usual time limits set out in section 170 of the ITAA 1936.
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Example 18: amendment for foreign income tax offset
Aust Co, an Australian resident company, sells a rental property in the US, making a gain in 2022-23. The gain is taxed in the US and Australia. Aust Co pays the US income tax before lodging its Australian return for 2022-23. In February 2024, Aust Co receives a refund of part of the US tax paid because of the favourable outcome of a dispute over the calculation of the gain. An amendment to Aust Co's 2022-23 assessment to reflect the reduction in US tax paid, and consequently its foreign income tax offset can be made on or before February 2028. |
Continue to: Record keeping for FITO
References
ATO references:
NO QC 72280
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