Quarantined Foreign Losses

Prior to 1 July 2008, deductions incurred in deriving foreign income were applied against assessable foreign income of the same class (of which there were four - interest, modified passive, other and offshore banking income). Where the deductions exceeded the assessable foreign income of that class, the resulting foreign loss was quarantined from domestic income and could only be applied against future income of that class. As a result of change in Legislation for income years commencing after 1 July 2008, foreign losses are no longer quarantined into separate classes and nor are they quarantined from domestic income.

In prior years BT did not calculate any foreign expenses/losses the client could claim as a deduction, but rather provided the necessary information (such as the classes of foreign income) for the client to work it out. As a result of the change in Legislation and the removal of the foreign income classes, foreign income from Trust distributions (other than CFC or FIF income) will be disclosed as one foreign income amount (this was previously disclosed as Trust distributions - other foreign income - modified passive, other, undisclosed as well as foreign dividends and foreign interest) on BT Tax Statements. However foreign income from directly held foreign assets will continue with the same disclosure as before (interest, dividends etc.) as we are of the view that clients may require this level of detail for other reasons.

Foreign Tax Credits

From 1 July 2008 there are also changes to the foreign tax credit calculation (now referred to as the Foreign Income Tax Offset calculation). Prior to 1July 2008 the entitlement to a foreign tax credit and the amount of the credit was determined separately for the classes of foreign income. From 1 July 2008 the Foreign Income Tax Offset calculation is determined on a whole-of-income basis and not on a class of income basis.

In prior years in the detailed supporting schedule called 'Summary of Foreign Tax Credits', BT provided the details of the foreign income tax credits in the various classes to assist the client with their foreign income tax credit calculation. From 1 July 2008, similar to prior years BT will provide details of the Foreign Income Tax Offsets (without the details of the classes) in the detailed supporting schedule 'Summary of Foreign Income Tax Offsets' to assist the client with their Foreign Income Tax Offset calculation.

The information in this article is current as at 19 June 2009. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation. Your individual situation may differ and you should seek independent professional tax advice on any taxation matters.