What is the foreign income tax offset in Australia?
The foreign income tax offset (FITO) in Australia allows you to reduce your Australian tax payable by the amount of foreign tax you've paid on income already included in your Australian assessable income. It prevents double taxation on foreign earnings.
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How it works in practice
Understanding the Foreign Income Tax Offset
The foreign income tax offset (FITO) is a crucial mechanism in Australia's tax system designed to prevent individuals and entities from being taxed twice on the same income – once in a foreign country and again in Australia. When you derive income from overseas, such as foreign employment income, dividends, or capital gains, it may be subject to tax in both the foreign country and Australia.
How FITO Works
Australia's tax residency rules mean that if you are an Australian resident for tax purposes, you are generally taxed on your worldwide income. If you've paid foreign income tax on a portion of your income that is also included in your Australian assessable income, you can claim a FITO. This offset reduces the amount of Australian tax you have to pay, up to a limit. The limit is generally the amount of Australian tax payable on that foreign income, ensuring the offset doesn't reduce your tax liability below zero or offset tax on purely Australian-sourced income.
Important exceptions
The foreign income tax offset has specific limitations. The offset cannot exceed the amount of Australian income tax payable on that foreign income, meaning it won't reduce your overall Australian tax liability beyond what's attributable to the foreign income. It also cannot be carried forward or backward to other income years. There are specific rules for calculating the foreign income tax component, and certain types of foreign income or tax payments may not be eligible for the offset, such as foreign tax paid on non-assessable non-exempt income or if a double tax agreement provides a better outcome.
What you should do now
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Determine if you are an Australian resident for tax purposes, as this impacts your worldwide income assessment.
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Calculate your total foreign assessable income, ensuring all foreign earnings are included in your Australian tax return.
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Identify the amount of foreign income tax actually paid on that foreign income.
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Calculate the foreign income tax offset limit, which is generally the Australian tax payable on your foreign income.
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Lodge your tax return with the ATO, claiming the eligible foreign income tax offset.
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