Many Australians are employed by an international company or work part of their time in a foreign country – but what happens when it comes time to pay your income tax when your income comes from different countries? Are you ‘double taxed’? That doesn’t seem fair. After all, you don’t work just to give it all away in taxes.
With the aim to avoid double taxing individuals, foreign income tax rules apply to those Australians who work internationally or receive income from foreign sources. The foreign income tax offset (FITO) may also be available for those eligible.
Prior to 1 July 2008
Arrangements for claiming foreign income tax credits have been in place since 1 July 2008. For claims prior to 30 June 2008, please see the Australian Tax Office’s (ATO) guidance here.
Who Is Entitled To Claim A Foreign Income Tax Offset (FITO)?
You must have paid foreign income tax to be eligible. This income tax must be included as part of your assessable income for Australian incomes tax purposes and is available in the same year you paid tax.
The tax you paid must be a tax on your income, a tax on profits or gains from an income or capital venture and tax that is subject to an agreement covered by the International Tax Agreements Act 1953.
Foreign Taxes Not Included
Some taxes don’t count towards the foreign tax offset. These taxes are:
- inheritance taxes
- annual wealth taxes
- net worth taxes
- taxes based on production
- credit absorption taxes
- unitary taxes
- Penalties, fines and interest do not qualify as foreign income tax.
Pro Tax Tip: You must convert all foreign income, deductions and foreign tax paid into Australian dollars for tax purposes.
CHAT WITH A FRIENDLY ITP TAX ACCOUNTANT TODAY
How To Claim
There are two ways to claim the FITO, and this depends on how much tax you’ve paid. If you’re claiming a FITO of $1,000 or less, you only need to record the amount of foreign income tax you’ve paid when you lodge your Australian tax return.
If you’re claiming more than $1,000, you’ll need to work out your limit because there is a cap.
Pro Tax Tip: Always keep sufficient proof when you claim any tax offset or make any tax claim
Written Evidence
When you claim the FITO, you’ll need written documentation to show:
- The amount of foreign tax or gains you’ve earned and in which country
- The year in which you earned the foreign income
- The nature and amount of foreign tax levied that you paid
- The date
- Whether the tax was an advance, instalment or final amount
Evidence includes:
- A statement from the foreign tax authority
- Payslips, payment summaries showing tax paid
- A copy of your foreign income tax return showing tax has been paid
- A letter from the foreign tax authority stating payment has been met
Pro Tax Tip: The ATO may not ask for written evidence when you lodge your Australian tax return, but you’ll need to provide it in case they do ask.
Working Out Your Foreign Income Tax Offset Over $1,000
When working out your foreign income tax offset limit you’ll need to compare your tax liability and the tax liability you’d have if certain foreign-income and foreign-sourced income and tax deductions were disregarded.
- Work out your tax payable by you including the Medicare Levy and Medicare Levy Surcharge) for the current year, excluding penalties, interest and other tax offsets
- Assume that your assessable income didn’t include amounts on which foreign income tax has been paid that counts towards your FITO and any other income or gains from a non-Australian source
- Remove tax deductions you weren’t entitled to
Pro Tax Tip: A tax offset cannot be claimed until after the foreign tax has been actually paid Anna, an Australian resident taxpayer for the year ended 30 June 2022, has income and expenses and pays foreign income tax for the income year as follows:
| Income and deductions | Amount |
| Employment income from Australia | A$22,000 |
| Employment income from United States | A$6,000 |
| Employment income from United Kingdom | A$4,000 |
| Rental income from United Kingdom | A$1,000 |
| Dividend income from United Kingdom | A$600 |
| Interest income from United Kingdom | A$400 |
| Total assessable income | A$34,000 |
| Expenses incurred in deriving employment income from Australia | A$2,000 |
| Expenses incurred in deriving employment income from United States | A$450 |
| Expenses incurred in deriving rental income from United Kingdom | A$250 |
| Interest (debt deduction) incurred in deriving dividend income from United Kingdom | A$70 |
| Expenses (debt deduction) incurred in deriving interest income from United Kingdom | A$30 |
| Gift to deductible gift recipient | A$70 |
| Total allowable deductions | A$2,870 |
| Taxable income | A$31,130 |
Foreign income tax paid
| Tax paid | Amount |
| Employment income from United States | A$1,800 |
| Employment income from United Kingdom | A$1,200 |
| Dividend income from United Kingdom | A$60 |
| Interest income from United Kingdom | A$40 |
| Rental income from United Kingdom | A$300 |
| Total foreign income tax paid | A$3,400 |
Anna calculates her tax payable is $3,079.30 including the Medicare Levy. Her assessable income doesn’t include the following foreign income:
| Tax paid | Amount |
| Employment income from United States | A$6,000 |
| Employment income from United Kingdom | A$4,000 |
| Rental income from United Kingdom | A$1,000 |
| Dividend income from United Kingdom | A$600 |
| Interest income from United Kingdom | A$400 |
| Total | A$12,000 |
Anna calculates that her total expenses incurred through earning her foreign income is $700. Tax paid on her calculations is $309.70. As $19,830 is below the Medicare low income threshold, the Medicare levy is not applied. Anna calculates her tax paid less expenses: $3,079.30 − $309.70 = $2,769.60
$2,769.60 is Anna’s FITO limit. 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.
Pro Tax Tip: A tax offset cannot be claimed until after the foreign tax has been paid
Calculating foreign income and assessing eligibility for FITO can be messy and complicated. We suggest the help of a tax professional to help with any tax matters. Phone 1800 367 487 and chat with a friendly professional today.