ATO ruling clarifies FITO calculation where there are untaxed foreign capital gains
The amount of FITO a taxpayer can claim for an income year is based on the foreign income tax they paid on amounts included in their assessable income for the year. However, in certain circumstances, there is a limit on the offset amount. Refer to S.770-70 and S.770-75.
Broadly, the amount of a taxpayer’s FITO entitlement for an income year varies depending on whether or not the foreign income tax paid is less than or equal to, or exceeds, $1,000:
- If foreign income tax paid is $1,000 or less, the amount of the FITO that may be claimed is simply equal to the amount of the foreign income tax paid.
- If foreign income tax paid exceeds $1,000, the taxpayer may either:
- Claim a FITO of $1,000 – note that, by doing so, the benefit of the excess foreign income tax paid is effectively wasted, as it is not refundable and cannot be carried forward to offset tax on foreign income derived in a later income year. However, in marginal cases, this option may reduce compliance costs associated with calculating the FITO limit; or
- Claim an offset up to the amount of the taxpayer’s FITO limit – broadly, the purpose of the limit is to ensure a taxpayer cannot claim more than the Australian income tax that would be payable due to the double-taxed income (i.e., if the foreign tax paid is higher).