Private ruling: Foreign Income Tax Offset (FITO)
Date of advice: 5 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Question and answer | Are you entitled to receive a foreign income tax offset in relation to the foreign tax paid in Country Y on your salary? | Yes.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You have been working for a Country Y company and have had Country Y tax deducted from your salary.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 770-10 | Income Tax Assessment Act 1997 Subsection 770-10(1) | Income Tax Assessment Act 1997 Section 770-75 | Income Tax Assessment Act 1997 Subsection 770-75(1) | Income Tax Assessment Act 1997 Subsection 770-75(2)

Reasons for decision: Detailed Reasoning - Foreign income tax offset: With effect from 1 July 2008, the foreign tax credit (FTC) system has been replaced by the foreign income tax offset (FITO) system contained in Division 770 of the ITAA 1997. Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to a FITO for foreign tax paid in respect of an amount that is included in the person's assessable income in a year of income. It is not necessary that the payment of foreign income tax actually occurs in the claim year. To determine the amount of FITO in any particular year, a person must first calculate the total foreign income tax paid on amounts included in their assessable income for the year. You will need to include your foreign income from country Y in your Australian tax return. The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset. The FITO rules do not allow for the carry forward of excess foreign tax. This means that all available FITO will need to be utilised in the year in which they arise. There will be no opportunity to carry them forward for use against future Australian tax on foreign income. Furthermore, there is a FITO limit. Where the total foreign income tax paid by a person is less than or equal to $1,000, the person is not required to calculate the FITO, i.e. the person's FITO will equal the foreign income tax paid on amounts included in the their assessable income. Where the total foreign income tax paid is more than $1,000, the person can choose to offset only $1,000 of foreign tax (and not formally calculate the FITO entitlement) or calculate the offset limit to determine the maximum FITO entitlement under section 770-75 of the ITAA 1997. You are entitled to a FITO for the tax paid on your income in Country Y.