Determining the FITO limit amount
As noted above, where the foreign income tax paid exceeds $1,000 and the taxpayer does not wish to apply the $1,000 de minimis cap, they must calculate their FITO limit. The amount of a taxpayer’s FITO limit is determined under S.770-75 and, generally, it is calculated as:
- the Australian tax payable (including Medicare levy and surcharge if applicable, but before applying any tax offsets) on the taxpayer’s taxable income for the income year; less
- the Australian tax that would be payable if certain income, and deductions reasonably related to that income, were excluded from the taxpayer’s taxable income.
The income to be excluded from a taxpayer’s assessable income when calculating the FITO limit is specified in S.770-75(4)(a) as being:
- so much of any amount included in your assessable income as represents an amount in respect of which you paid foreign income tax that counts towards the tax offset for the year; and
- any other amounts of ordinary income or statutory income from a source other than an Australian source...” [Emphasis added]
Note that S.770-75(4)(b) excludes deductions (except debt deductions) that are reasonably related to amounts excluded from assessable income under S.770-75(4)(a), and certain debt deductions.
TAX TIP – Exclusion of foreign income may increase FITO claim
In practical terms, the exclusion of income under S.770-75(4)(a) will generally increase a taxpayer’s FITO limit and, in turn, may increase the amount of their FITO claim.