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Is the average rate of Australian tax under section 160AF of the Income Tax Assessment Act 1936 (ITAA 1936) determined separately for each class of taxable income of a life insurance company?

No. The average rate of Australian tax for a life insurance company is calculated by dividing tax payable on the whole of the taxable income by that taxable income.

A life insurance company has a taxable income of $8,000,000. The company's ordinary class of taxable income is $7,000,000, including $2,000,000 of foreign income, and its complying superannuation class of taxable income is $1,000,000.

The ordinary class of taxable income is taxed at 30% and the complying superannuation class of taxable income is taxed at 15%. Total tax payable by the life insurance company under section 4-10 of the Income Tax Assessment Act 1997 (ITAA 1997) is $2,250,000. The company has no tax offsets for the year.

Foreign tax of $600,000 was paid in respect of the foreign income.

Section 320-135 of the ITAA 1997 divides a life insurance company's taxable income into two classes: • the ordinary class, and • the complying superannuation class.

The average rate of tax is defined in subsection 160AF(8) of the ITAA 1936 in relation to a taxpayer to mean the amount determined by dividing: • the income tax that would be assessed in respect of the taxpayer's taxable income (if certain rebates and credits were not allowed and if the taxpayer was not liable to pay additional tax under Division 7 of the ITAA 1936), by • the taxable income of the taxpayer.

The taxable income of a life insurance company for the purposes of subsection 160AF(8) of the ITAA 1936 is the sum of both classes of income. This subsection does not permit each class of taxable income to be treated as the sole taxable income for the purposes of calculating the average rate of Australian tax.

The amount of income tax that would be assessed in respect of the life insurance company is $2,250,000. The average rate of tax for the life insurance company is therefore 28.125%, being $2,250,000 divided by $8,000,000.

Subsection 160AF(1) of the ITAA 1936 provides that a taxpayer is entitled to a foreign tax credit where the assessable income of a resident taxpayer includes foreign income and the taxpayer has paid foreign tax for which they are personally liable in respect of that income.

The amount of the credit is the lesser of the foreign tax paid or the Australian tax payable in respect of that foreign income.

Accordingly, the allowable foreign tax credit in the income year under subsection 160AF(1) of the ITAA 1936 is the lesser of: • the amount of foreign tax paid ($600,000), and • the amount of Australian tax payable in respect of the foreign income (28.125% applied to $2,000,000 which is $562,500).

Therefore, the foreign tax credit allowed for that income year is $562,500.