Foreign tax credits - UK tax paid by Australian resident on rental income earned in the UK

Is a foreign tax credit allowable under section 160AF of the Income Tax Assessment Act 1936 (ITAA 1936) for tax paid in the United Kingdom (UK) by an Australian resident taxpayer on rental income earned in the UK?

Yes. A foreign tax credit is allowable under section 160AF of the ITAA 1936 for tax paid in the UK by an Australian resident on rental income earned in the UK.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer owns an investment property in the UK.

The taxpayer earns rental income from the property and will be liable for tax on that rental income in both Australia and the UK.

Subsection 160AF(1) of the ITAA 1936 provides that a taxpayer will be entitled to a foreign tax credit if the following conditions are satisfied: • the assessable income of the taxpayer includes foreign income; and • the taxpayer has paid foreign tax in respect of that foreign income, being tax for which the taxpayer is personally liable.

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

The Australian resident taxpayer has earned rental income from a property located in the UK on which tax is payable in the UK. The foreign rental income is also assessable in Australia under section 6-5 of the Income Tax Assessment Act 1997 . As the conditions contained in subsection 160AF(1) are satisfied, the taxpayer is entitled to a foreign tax credit for the tax paid in the UK. The amount of the credit will be the lesser of the foreign tax paid or the Australian tax payable in respect of the foreign income.