Introduction
If you have assessable income from overseas, you must declare it in your Australian income tax return.
If you have paid foreign tax in another country, you may be entitled to an Australian Foreign Income Tax Offset (FITO), which provides relief from double taxation.
This page discusses what the Australian Foreign Income Tax Offset (FITO) is.
What you need to know
To be entitled to a foreign income tax offset:
- The foreign tax must be foreign income tax
- You must have actually paid, or be deemed to have paid an amount of foreign income tax
- The income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes
As a non-refundable tax offset, the foreign income tax offset reduces your income tax payable. Under the tax offset ordering rules, it is applied after all other non-refundable tax and non-transferable offsets. Once your tax payable has been reduced to nil, any unused foreign income tax offset is not refunded to you, nor can it be carried forward to later income years.
You can refer Guide to foreign income tax offset rules 2017-18 for calculating the offset limit for more tax information.
You can also refer to the use guide How does Class Deal With Foreign Income Tax Offset for more information.
Double tax agreements (DTA)
Australia has entered into a number of comprehensive DTAs with over 40 countries to avoid international double taxation and prevent fiscal evasion. The following table summaries the DTAs and sets out the general source country tax limits applicable to most unfranked dividends, interest and royalties. In each case, reference must be made to the DTAs on treasury.gov.au for details of precise requirements.
Foreign withholding tax table (DTA table)
|
Stock Exchange |
Code |
Country |
Dividend (%) |
Interest (%) |
|
American Stock Exchange |
AMEX |
US |
15* |
10 |
|
New York Stock Exchange |
NYSE |
US |
15* |
10 |
|
New York Stock Exchange ARCA |
NYSE ARCA |
US |
15* |
10 |
|
NASDAQ |
NASDAQ |
US |
15* |
10 |
|
London Stock Exchange |
LSE |
UK |
15* |
10 |
|
Toronto Stock Exchange |
TSX |
Canada |
15 |
10 |
|
Hong Kong Stock Exchange |
HKEX |
China |
15 |
10 |
|
Singapore Stock Exchange |
SGX |
Singapore |
15 |
10 |
|
New Zealand Stock Exchange |
NZX |
NZ |
15 |
10 |
|
Tokyo Stock Exchange |
TSX |
Japan |
10* |
10 |
|
Frankfurt Stock Exchange |
XETRA |
Germany |
15 |
10 |
(References: http://www.treasury.gov.au)
Reference should be made to treaty texts for the conditions applicable to each rate limit. For reference purposes Australian non tax treaty withholding tax rates are Unfranked Dividends 30%, Interest 10% and Royalties 30%.
W-8BEN form
If your client holds for example, Google shares (NASDAQ:GOOG) through share registries and receives dividends from the investment, you may need get your clients to complete a Certificate of Foreign Status of Beneficial Owner (W-8BEN) form. Persons who are a non-resident of the US are subject to a maximum withholding tax rate of 30% on the income derives from US sources. Once the required form is completed by the fund, a less withholding tax rate may apply. In accordance with the DTA table, the withholding tax rate would be 15% in this case. If the SMSF does not fill in the required documents, then the registries will withhold the maximum rate of 30% for non-residents.
Instructions for Form W-8BEN
- You must give Form W-8BEN to the withholding agent or payer if you are a non resident who is the beneficial owner of an amount subject to withholding.
- The form must be completed in full and submitted before any income is paid or credited.
- A form will remain in effect until 31 December, three years after the date of signing.
- A W-8BEN form needs to be completed for each security an investor holds.
Foreign dividend generation consideration
The foreign dividend generation is consistent with the Reference Point Corporation Action specification as the following: “The cash dividend amount of the most recently announced dividend, payable in cents per security. This includes normal, special and scrip dividends.
The amount provided is converted into Australian dollar equivalent (using RBA's end of date exchange rate for the payment date or rates contained within the announcement), net of withholding tax, if applicable.
Why it matters
Unlike franking credits and TFN credits, foreign tax credits/foreign income tax offsets are not refundable. Your clients maybe potentially doing a disservice to their retirement benefits by sacrificing extra 15% in foreign tax credits which otherwise will be cash in their bank account. This is especially true when the fund is close to full pension phase, where the most of the tax credits will be lost straightaway by the pension exemption actuarial percentage.
- The foreign income announcement generation will automatically provide 15% or 30% withholding rate for dividends and 10% for interest income. To read more on foreign dividend withholding, please see Match Transactions and Example: Using Fit to Cash for Foreign Transactions
- Class cannot change dividend income announcement to be recorded at 53.5% (1 - 46.5%) if for example a taxpayer fails to provide their TFN to the share registry.