Franking credit vs Foreign income tax offset

Hi all - a question about the practical difference between franking credits (FC) and foreign income tax offset (FITO)

Are they practically the same value, with some minor differences?

eg in my personal tax return, say I'm looking at a tax bill of $10000, and I have $1000 in FC and $1000 in FITO. So at the end of the day do I pay the ATO $8000?

 

Very different. Franking credits are refundable. FTC are not. FTC can be limited to the extent of tax on the foreign income. They are reported at different labels in the return. There is a foreign income worksheet that is complex for most DIY taxpayers. It will assist to calculate and limit FTC use.

eg Francis has some investment income through VGS. Her elements of income include $1200 of foreign income and $300 of FTC. Francis has a taxable income of $8,000. The FTC are lost as there is no tax payable on the foreign income. If she had franked income the franking credit may be refundable. But if Francis has a taxable income of $23,000 the FTC may be reduced in some cases to reflect the tax payable on the $1200. There is a $1k minimum which is fully allowable if the return is correctly completed. Francis should then get a full $300 credit.

FTC from assessed tax on capital gains can be only half allowable eg Fred sells a US property and $8,000 of US tax is paid on the profit. He lodges a return and reports the AUD value of the CGT gain. He can only claim 50% x $8,000 since he only pays tax on 50% of the CGT amount.

The ATO get funny and are strict about the exchange rate to use if the FTC value is not reported to the taxpayer in AUD. The ATO expect official ATO / RBA rates to be used. I recently had an amendment where they argued about whether I should have used the rate in June or the average annual rate. The difference was worth a cup of coffee. They amended it to the average annual rate.

 

Fantastic, thanks for the clarification. Good example with the VGS, that's precisely my predicament!

 

LOL ... It often is VGS or VAS