Guide to foreign income tax offset rules 2023

This version is no longer current. Please follow this link to view the current version.

• This document has changed over time. View its history.

Special circumstances

Special circumstances

There are some special circumstances that apply in calculating the FITO for:

•

Superannuation funds

•

Consolidated groups

•

Life insurance companies

•

Offshore banking units

•

Foreign residents

•

Australian source income

Superannuation funds

Limits apply to the foreign income tax offset allowed for foreign income taxes paid by a superannuation fund or approved deposit fund where the fund changes:

•

from a complying superannuation fund to a non-complying superannuation fund, or

•

from a non-resident superannuation fund to a resident superannuation fund.

Where a non-complying fund or a resident fund includes an amount in assessable income under items 2 and 3 in the table in section 295-320 of the ITAA 1997 , and the fund paid foreign income tax on that amount (before the start of the income year) the fund is not entitled to a tax offset for the foreign income tax paid by the provider.

Consolidated groups

Only the head company of a consolidated group or multiple entry consolidated (MEC) group is entitled to a foreign income tax offset for foreign income tax paid on income or gains that are included in its assessable income under the single entity rule. Where a subsidiary member pays foreign income tax on income or gains included in the head company's assessable income, the head company is treated as having paid the tax.

The head company's foreign income tax offset is determined in the same way as for taxpayers outside the consolidation regime.

Life insurance companies

The core rules for the foreign income tax offset also apply to life insurance companies. As the income of life insurance companies is taxed at 2 different rates (ordinary class, taxed at 30%; and complying superannuation class, taxed at 15%), it is necessary to determine the amount of assessable income in each class on which foreign income tax has been paid at step 2 of the foreign income tax offset limit calculation .

Foreign income tax paid on NANE income derived from segregated exempt assets does not count towards a tax offset.

Offshore banking units

Specific rules apply to calculating the tax offset for foreign income tax paid on the assessable offshore banking income of an offshore banking unit (OBU).

The foreign income tax paid on the offshore banking income of an OBU is taken to be one-third (the current offshore banking eligible fraction) of the amount of tax actually paid. This approach mirrors the tax treatment of assessable offshore banking income, which results in only one-third of that amount actually being included in assessable income, with the other two-thirds being treated as non-assessable non-exempt income.

Changes to Australia's Offshore Banking Unit Regime in 2023-24

As a result of changes to the Offshore Banking Unit (OBU) regime , an OBU's assessable offshore banking income will be taxed at its relevant corporate tax rate from the commencement of its 2023-24 income year. Rules that deem an OBU to have only paid one-third of its foreign income tax on its offshore banking income will also no longer apply meaning that its FITO will be calculated using the ordinary rules. The changes will have effect from the commencement of an OBU's 2023-24 income year. For example, for an OBU whose income year end is 31 December, the new rules have effect from 1 January 2023. For an OBU whose income year end is 30 June, they have effect from 1 July 2023.

Foreign residents

While the offset mainly applies to residents, where the foreign income of a foreign resident is taxed in Australia they may be able to claim an offset.

These circumstances apply where a foreign resident pays income tax in a foreign country on an amount that is included in their assessable income (under Australian tax law) and such tax is imposed because the income is sourced in that country. By contrast, where a foreign country imposes tax on the amount included in an entity's assessable income merely because it is a resident of that country (that is, residence-based taxation) a foreign income tax offset entitlement does not arise if the tax is imposed on income from a source outside the foreign country.

Australian source income

While Australian residents are normally subject to foreign income tax only on their foreign source income, the foreign income tax offset applies to all income on which foreign income tax has been correctly applied. This situation will arise in very limited circumstances.

For example, foreign income tax imposed by Timor-Leste on assessable income derived by an Australian-resident taxpayer from certain activities carried out in the Joint Petroleum Development Area of the Timor Sea will count towards the taxpayer's tax offset.

References

ATO references:
NO QC 72280