Income

6.5.3 Income: Taxation Issues: Accounting for Foreign Tax Deducted

When income is received from certain overseas sources, tax may be deducted by the payer and paid to a foreign government. In such cases, you may need to understand the terms of the tax treaty (if any) that exists between the Australian Government and the foreign government that receives the tax payment.

In many cases, your fund will be entitled to claim part or all of the foreign tax deducted against any tax payable (or as a tax credit) when you file your fund’s next annual income tax return.

To record foreign tax deducted from income received, enter the NET income received (after tax is deducted) .    (Refer to instructions in 6.1 Adding Dividend Income, or, if entering income from assets other than Direct Equities or Hybrids, locate instructions for adding income from the relevant asset,)


NOTE:  Dividend income etc. from overseas sources should be entered as UNFRANKED.


Income_foreignequities

Next, go to JOURNAL ENTRIES on the SETTINGS MENU.

Income_Withholdingtax2_JNLMENU

Create a NEW JOURNAL ENTRY.

You will need to transfer any Dividend income from Equities or Hybrids from Account 4-1170 (Unfranked Dividend Amount) to 4- 1110 (Gross Foreign Income.)

This is done by DEBITING the Income Account (4-1170 Unfranked Dividend Amount) and CREDITING Gross Foreign Income (4-1110).

If the foreign income was from Fixed Interest, Cash Interest, Unit Trust, Bonds or Managed Funds, you will need to transfer the income from the Income Account credited (as noted in the table below) to 4-1110 (Gross foreign income).

In this case:

For income from foreign bonds Debit 4-1030 Credit 4-1110
For Interest on foreign Fixed interest investments Debit 4-1040 Credit 4-1110
For Income from foreign Unit Trusts Debit 4-1050 Credit 4-1110
For Interest received on foreign cash deposits Debit 4-1060 Credit 4-1110
For income from foreign Direct Property Debit 4-1300 Credit 4-1110
For Managed funds income Debit 4-1160 Credit 4-1110

In the same journal, account for the foreign tax credits by DEBITING Account 2-1104 (Income Tax Foreign Tax Credit) and CREDITING Account 4-1110 Gross Foreign Income. (This increases the income from the net amount entered to the full gross amount and correctly accounts for the tax deduction so you can claim it on your Fund’s tax return).

The screenshot below shows the correct journal entry for a dividend received from a foreign entity where the gross dividend was $64 and $9 tax was deducted, leaving net income received of $55 as shown in the screenshot above. (For foreign income from sources other than dividends on equities or hybrids, change the selected account in Row 1 in the screenshot below to the account noted in the table above.)

Income_ForeignTax_JNLENTRY


NOTE:  An upgrade to Mclowd is planned to automate the process of accounting for foreign tax when entering dividends and remove the need for the additional journal entry.


 

about the author:

Lorraine Cobcroft

With a background in accounting and financial management, followed by two decades writing software documentation, Lorraine joined the Mclowd team in mid-2016 and is enjoying working with a dynamic team to enhance an innovative product that has the potential to revolutionize the way Australians manage their retirement funding.
Lorraine is also an accomplished business writer, ghost-writer, novelist and short-story writer and poet.

Leave a Reply