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AJML Accountants Update – July 2020

Residency for tax purpose – Part 13

How to calculate your foreign income tax offset limit

If you are claiming a foreign income tax offset of more than $1,000, you will first need to work out your foreign income tax offset limit.


Work out the income tax payable by you for the relevant income year disregarding any tax offsets. This amount does not include Medicare levy, Medicare levy surcharge, penalties or interest.

Step 2

Work out the income tax that would be payable by you (excluding the Medicare levy and surcharge, penalties and interest), disregarding any tax offsets, if the following assumptions were made:

  • your assessable income did not include:
    • any amount included in your assessable income on which foreign income tax has been paid that counts towards your foreign income tax offset, and
  • any other income or gains from a non-Australian source, and
  • you were not entitled to the following:
  • debt deductions attributable to your overseas permanent establishment
  • any other deductions (other than debt deductions) that are reasonably related to any amount covered by the first dot point above, and
  • an amount of the foreign loss component of one or more tax losses deducted in the income year.

For the purpose of this step, where deductions relate exclusively to the disregarded income amounts you should assume that you were not entitled to these amounts. Whether a deduction reasonably relates to the disregarded assessable income amounts will be a question of fact depending on the circumstances of the taxpayer. Where deductions relate to both disregarded income amounts and other assessable income (as would typically be the case with head office and general administration expenses) you will need to apportion the deductions on a reasonable basis.

Allowable deductions for items such as gifts, contributions, superannuation and tax agent’s fees are not considered to be reasonably related to any amount on which foreign income tax has been paid or other non-Australian source income.

Step 3

Take away the result of step 2 from step 1. If the result is greater than $1000, this is your offset limit.

Common Reporting Standard for the automatic exchange of financial account information

The Common Reporting Standard (CRS) is the single global standard for the collection, reporting and exchange of financial account information on foreign tax residents. Under it, banks and other financial institutions will collect and report to us financial account information on non-residents. We will exchange this information with the participating foreign tax authorities of those non-residents.

In return, we will receive financial account information on Australian residents from other countries’ tax authorities. This will help ensure that Australian residents with financial accounts in other countries are complying with Australian tax law and act as a deterrent to tax evasion.