Foreign tax credit rule changes to benefit managed funds

Changes to the foreign tax credit rules have made it easier for people investing overseas to gain tax benefits, according to William Buck tax manager David Martland.

The new rules have removed a complicated income class system so that foreign income tax offsets (previously foreign tax credits) and foreign losses (or foreign tax deductions) can be applied to any foreign income, Martland said.

They are particularly relevant for the managed funds industry, which invests heavily in overseas markets, and for individuals with foreign investments who typically receive foreign tax credits and may have foreign losses, he said.

“Perhaps the biggest benefit of the changes is the ability to apply foreign losses against domestic income. This ensures that if you are making domestic income, you will be able to offset foreign losses (subject to certain restrictions for carry forward losses) against that income.”

Previously, foreign tax credits were quarantined by class, which meant that in some circumstances these credits might never be used and would be lost after five years, Martland said.

Likewise, he said, foreign losses were quarantined into four separate income classes, which meant if you didn’t have income of the same class, the losses were carried forward indefinitely.

The new rules apply to tax returns lodged for income years commencing on or after July 1, 2008.