Foreign Income Tax Offset

Q&A Tax

Question :

Mr C:

  • is an Australian Tax Resident working in the USA
  • owns rental property in Seattle.
  • sold this rental property during the 2018/19 financial year
  • Mr C calculates that the capital gains tax owing to the USA tax authority will be approx $10K USD

When preparing the Australian ITR is the following correct?

  • the foreign income (including the reported capital gain) converted to Australian $ will be shown on
    the ITR as ‘foreign’ income
  • the tax paid to the USA including the capital gains component converted to Australian Dollar will
    be shown on the ITR as ‘foreign tax offset’.
  • The offset can then be used to reduce the total Australian tax liability to NIL but not create a
    refund.

 

Answer :

1. Foreign sourced capital gains should be shown at item 18 in the client’s tax return rather than item
20. See: https://www.ato.gov.au/Individuals/Tax-return/2019/Supplementary-tax-return/Incomequestions-13-24/20-Foreign-source-income-and-foreign-assets-or-property-2019/

However, if the client is able to claim a foreign income tax offset for the tax paid in the US then this
should be disclosed at item 20.

2. You will need to work through the foreign income tax offset (FITO) rules in detail to confirm the
amount (if any) of the FITO that the client can claim. This will not always be the same as the amount of
foreign tax paid.

For example, if the full gross capital gain made on the sale of the property is taxed in the US but only
some of the gain is taxed in Australia (e.g., because of the CGT discount) then only that portion of the
foreign tax will qualify under the FITO rules. Also, the amount of the FITO depends on the client’s
Australian tax position (e.g., the marginal Australian tax rates compared with US tax rates etc).

3. A FITO can reduce Australian tax payable to nil, but excess amounts cannot be refunded or carried
forward.

See the Knowledge Bank procedure-foreign-income-tax-offsets for further guidance on working
through the FITO rules

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