Avoid Double Taxation: What Is Foreign Income Tax Offset?

In Short

• Understand FITO: The Foreign Income Tax Offset (FITO) helps prevent double taxation by allowing businesses to offset foreign taxes paid against their Australian tax liability.

• Meet Eligibility Criteria: To claim FITO, include foreign income in your Australian tax return, ensure foreign taxes are paid on that income, and adhere to timing requirements.

• Maintain Accurate Records: Keep detailed documentation of foreign income and taxes paid to substantiate your FITO claims and comply with ATO guidelines.

Tips for Businesses

To avoid double taxation, businesses should consult tax professionals to ensure compliance with both Australian and foreign tax laws. Stay updated on tax treaties and regulations, as they can significantly impact your tax liabilities. Additionally, maintain organised records of foreign income and taxes paid to support your claims and ensure smooth audits.

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Table of Contents

• What Is FITO?
• Eligibility and Rules for Claiming FITO
• When Does FITO Apply?
• Calculating the Foreign Income Tax Offset
• Claiming the Foreign Income Tax Offset
• Other Considerations for FITO
• Key Takeaways
• Frequently Asked Questions

As an Australian business earning income abroad, managing international tax obligations is crucial. The Foreign Income Tax Offset (FITO) helps you avoid double taxation by allowing you to offset foreign taxes paid against your Australian tax liability. This article explores FITO, including eligibility requirements, key rules, and the circumstances in which it applies, helping you navigate international tax compliance effectively.

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What Is FITO?

The FITO prevents Australian businesses from paying tax twice on foreign income, once in the foreign jurisdiction and again in Australia. If your business pays tax on income earned overseas and that income is also subject to Australian tax, FITO provides relief by offsetting the foreign tax paid against your Australian tax liability. This provision is integral to Australia’s tax system, promoting fairness and encouraging international business activity.

Eligibility and Rules for Claiming FITO

To claim FITO, your business must meet specific eligibility requirements outlined by the Australian Taxation Office (ATO).

1. Inclusion of Foreign Income in Assessable Income: You must include foreign income in your assessable income on your Australian tax return. This includes income from overseas sales, services, or investments. If you do not declare the foreign income in your assessable income, you cannot claim FITO.
2. Payment of Foreign Income Tax: You must pay the tax to a foreign government, and it must relate to income assessed in Australia. For example, if your business earns revenue overseas and pays corporate tax, you can claim FITO when Australia also taxes the income.
3. Timing of Tax Payment: Foreign tax must be paid in the same income year as the reported income. Additional checks apply for taxes paid later.
4. No Double Credits or Deductions: You cannot claim FITO for foreign tax already credited, refunded, or deducted under any other Australian tax provisions. This rule ensures that businesses do not receive dual tax benefits.
5. Foreign Tax Type: FITO applies only to specific types of taxes levied on income. Non-income-related taxes, such as VAT or GST, are excluded.

These rules are crucial for determining FITO eligibility and ensuring compliance.

When Does FITO Apply?

FITO applies in scenarios where foreign income is taxed overseas and in Australia. Common examples include:

• International Investments: Income earned from foreign investments. This includes dividends or interest, which may be subject to withholding taxes in the source country. FITO may be able to offset these taxes.
• Foreign Contracting or Consulting Work: If your business earns income from overseas contracts or services and pays local taxes, FITO may apply.
• Permanent Establishments: If your business has a permanent establishment (e.g., a branch or an office) in a foreign country that generates income subject to local tax, you may claim FITO on those taxes.

Calculating the Foreign Income Tax Offset

The FITO you can claim is the lesser of the following:

• the amount of foreign tax paid, or
• the Australian tax payable on the foreign income.

To calculate the Australian tax payable, determine your business’s average tax rate and apply it to the assessable foreign income. The full amount can be claimed without additional calculations for foreign tax paid of $1,000 or less.

Claiming the Foreign Income Tax Offset

Claiming FITO involves:

1. Record-Keeping: Retain detailed records of foreign income and taxes paid. This includes payment receipts, tax assessments, and correspondence with foreign tax authorities.
2. Lodging the Tax Return: Report foreign income in your assessable income. Then, claim FITO in the designated section of your business tax return.
3. Supporting Evidence: While not always required when filing, maintain documentation to substantiate your claim if requested by the ATO.

Ensuring accurate reporting and compliance is critical for successful FITO claims.

Other Considerations for FITO

• Non-Deductibility: foreign taxes claimed under FITO cannot also be deducted as expenses.
• Excess Tax Paid: If the foreign tax exceeds the Australian tax, the excess cannot be carried forward or refunded.
• Tax Treaties: Seek professional advice on the impact of tax treaties between Australia and foreign countries. This is because they can affect the amount of foreign tax payable and your FITO entitlement.
• Currency Conversion: You may need to consider the exchange rate to convert foreign tax payments into Australian dollars on the payment date.

Key Takeaways

The FITO helps Australian businesses avoid double taxation on foreign income. To claim FITO, include foreign income in your assessable income, ensure foreign taxes were paid, and meet ATO rules. Maintain accurate records, calculate offsets correctly, and stay informed about applicable tax treaties and currency conversion rules. FITO provides valuable tax relief, ensuring your international operations remain efficient and compliant.

If you are uncertain about your legal obligations surrounding the FITO and potential double taxation on your foreign income, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Who is eligible to claim FITO? 

To claim FITO, businesses must include their foreign income in their assessable income on their Australian tax return, pay foreign taxes on that income, and meet other ATO requirements, including the timing of the tax payment.

How is the FITO amount calculated? 

The FITO amount is the lesser of the foreign tax paid or the Australian tax payable on the foreign income. Businesses can easily claim FITO for foreign taxes of $1,000 or less without additional calculations.