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Foreign Tax Credits on Overseas Asset Sales
Updated: Sep 4, 2022
Can you claim all foreign tax paid when selling an overseas asset?
Current at 27 July 2026. Not necessarily. An Australian foreign income tax offset is not a reimbursement of every amount charged overseas. Division 770 generally requires the foreign tax to have been paid in respect of an amount included in Australian assessable income, and the available offset may then be reduced by the foreign income tax offset limit.
This distinction is particularly important where the foreign country taxes the full economic gain but Australia includes only part of that gain in assessable income, applies a different cost base, recognises the transaction in another year, or treats part of the foreign charge as something other than foreign income tax.
The Division 770 gateway
Section 770-10 provides the basic entitlement. Foreign income tax counts towards the offset where the taxpayer paid it in respect of an amount that is all or part of an amount included in assessable income for the relevant Australian income year.
The analysis therefore requires more than confirming that foreign tax was paid. The Australian adviser must identify the Australian assessable amount, the foreign-taxed amount, the legal character and source of each amount, the taxpayer who paid the tax, whether the tax is final, and whether a treaty changes the allocation of taxing rights or the credit mechanism.
What Burton decided about discounted capital gains
In Burton v Commissioner of Taxation [2019] FCAFC 141, the majority of the Full Federal Court held that the taxpayer was not entitled to count all United States tax paid on gains from overseas assets towards the Australian offset where only the discounted portion of the capital gain was included in Australian assessable income.
The principle should not be reduced to the slogan that the ATO always ignores 50 per cent of foreign tax. The actual calculation depends on the foreign tax paid in respect of the amount included in assessable income, the Australian CGT calculation, any treaty and the FITO limit. The proportion will not always be 50 per cent.
Why the foreign and Australian gains may differ
Different acquisition dates or cost bases, including market-value resets when Australian residence begins.
Different foreign-exchange conversion dates and currencies.
Australian CGT discounts, exemptions, rollovers, capital losses or small-business concessions.
Foreign rules that tax gross proceeds, deemed gains, currency movements, inheritance values or recaptured deductions differently.
Different contract, settlement, payment or assessment dates that place the income and foreign tax in different years.
Foreign taxes imposed because of citizenship or residence rather than source, where the treaty or Division 770 requires a more specific analysis.
The separate foreign income tax offset limit
Even where foreign tax counts towards the offset, section 770-75 can cap the amount available. A taxpayer may choose the simplified A$1,000 limit. A larger claim requires calculation of the statutory limit by comparing Australian tax payable with the tax that would be payable after disregarding specified foreign-taxed and foreign-sourced amounts and related deductions.
An excess FITO is generally neither refundable nor carried forward. The commercial loss of unused foreign tax should therefore be modelled before the sale rather than discovered in the Australian return.
Treaties do not guarantee a full credit
A treaty may allocate primary taxing rights, limit source-country tax or require the residence country to provide relief. It does not necessarily require Australia to credit foreign tax imposed contrary to the treaty or tax exceeding the treaty rate. Refund or objection procedures in the foreign country may need to be pursued first.
The particular asset and treaty article matter. Real property, shares in land-rich entities, business property of a permanent establishment and other capital assets may be allocated differently.
CGT events before and after 1 July 2027
For an ordinary eligible individual or trust gain from a CGT event before 1 July 2027, the existing CGT discount rules can still make the Burton issue directly relevant.
Legislation enacted on 26 June 2026 materially changes the calculation of many individual and trust capital gains for CGT events on or after 1 July 2027, including cost-base indexation and a minimum-tax regime, with specific exceptions and transitional deemed-sale rules. For a later sale, the FITO must be modelled against the assessable amount produced by the new rules; it should not be assumed that the former 50 per cent apportionment continues.
What to calculate before an overseas sale
Confirm Australian and foreign residence and the applicable treaty.
Calculate the foreign gain, tax and available foreign relief or refund.
Calculate the Australian capital proceeds, cost base, exchange-rate effects and CGT event date.
Apply capital losses, discounts, indexation, exemptions, rollovers and concessions in the correct order.
Determine how much foreign tax was paid in respect of the Australian assessable amount.
Calculate the FITO limit and identify any foreign tax that will be unusable.
Compare transaction timing, ownership, sale structure and available foreign-country elections before implementation.
Frequently asked questions
Is foreign tax automatically credited dollar for dollar?
No. The tax must count under Division 770 and the claim is subject to the FITO limit and any treaty restrictions.
Can unused foreign tax be carried forward?
Generally not under the current Australian FITO regime. Excess above the limit is ordinarily lost rather than refunded or carried forward.
Does Burton mean exactly half the foreign tax is denied?
No. Burton concerned a particular relationship between the foreign-taxed gains and the discounted amounts included in Australian assessable income. Other facts and the post–1 July 2027 CGT rules can produce different proportions.
Primary sources
Before acting
Extax Advisory can prepare a dual-country disposal model showing the foreign tax, Australian gain, treaty position, FITO entitlement and irrecoverable tax before the sale contract is signed.
This article provides general information only and does not constitute tax or legal advice. The ownership history, residence, asset type, treaty, foreign assessment and Australian legislation applying to the transaction must be reviewed before reliance.
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