How to Claim Foreign Tax Credit in Australia as a Company

Claiming a foreign tax credit (FTC) in Australia allows companies to offset foreign taxes paid on income earned overseas against their Australian tax liability for the same income. This system, regulated by the Australian Taxation Office (ATO), is designed to prevent double taxation and primarily applies to companies that are residents of Australia for tax purposes.

Here’s a practical breakdown of how Australian companies can claim FTCs:

---

Step 1: Withholding Tax Deduction by Foreign Customers

When an Australian company (AC) earns income from foreign sources, its foreign customers may deduct withholding tax from the payments. Let’s denote this withholding tax as W.

---

Step 2: Determine Australian Tax Liability

The Australian company will also need to calculate its tax liability on the foreign income under Australian tax laws. Let this tax liability be T.

---

Step 3: Compare Foreign Tax Paid (W) with Australian Tax Liability (T)

The credit claimable depends on the relationship between W (foreign tax paid) and T (Australian tax liability):

1. When T > W:

   • The company can claim a full credit for the amount of withholding tax (W).
   • The company will then pay the remaining balance to the ATO, calculated as T - W.

2. When T < W:

   • The company can only claim a partial credit, equivalent to T, as the credit is limited to the Australian tax liability.
   • The excess amount, W - T, becomes an additional tax cost for the company.

---

Step 4: Documentation Requirements

To claim the FTC, the company must obtain a certificate or official documentation from the foreign customer, confirming the amount of withholding tax deducted. This is essential to substantiate the claim.

---

Step 5: Completing the Company Tax Return

Australian companies must include the foreign tax credit details in their annual tax filing using ATO Form C (Company Tax Return). Ensure the following are accurately reported:

• Income from foreign sources under the relevant sections.
• The foreign tax credit under the foreign income tax offset (FITO) section.

---

By following these steps and maintaining proper records, Australian companies can effectively claim FTCs and reduce their overall tax liability.