When your Australian super fund invests internationally, the foreign country often deducts withholding tax on dividends, interest, and other income before remitting to the Australian fund. To prevent double taxation, Australian super funds can claim a Foreign Income Tax Offset (FITO) — commonly called a foreign tax credit — to offset the Australian tax on that income.
Why Foreign Tax Credits Matter in Super
Super funds pay 15% tax on investment income in the accumulation phase. When a fund receives international dividends, the foreign country may withhold 15–30% of the payment as a withholding tax.
Without relief, the fund would pay:
- 10% withholding in the US (reduced treaty rate) on dividends, THEN
- 15% Australian fund tax on the same income
With a foreign tax credit, the 10% US withholding offsets part of the 15% Australian tax — the fund pays only the 5% difference (net of credit). This avoids significant double taxation.
How Foreign Tax Credits Work in Super Funds
- The fund receives international income (dividend, interest) net of foreign withholding tax
- The fund includes the gross income (before foreign tax) in its assessable income
- The fund calculates Australian tax at 15% on the gross income
- The fund claims a Foreign Income Tax Offset (FITO) equal to the foreign tax paid
- Net Australian tax = 15% − FITO (but FITO cannot exceed the Australian tax on that income)
Example:
- US dividend: USD $1,000 gross
- US withholding tax (10% treaty rate): USD $100
- Net dividend received: USD $900
- ATO assessable income: USD $1,000 equivalent in AUD
- Australian fund tax at 15%: $150 (AUD equivalent)
- FITO claimed: $100 (AUD equivalent)
- Net Australian tax: $50
Limitations on the Credit
The Foreign Income Tax Offset cannot exceed the Australian tax liability on that foreign income — you cannot use it to create a refund. If the foreign tax rate exceeds 15%, the excess is wasted (cannot be refunded or carried forward).
Example:
- French dividend withholding: 30%
- Australian fund tax on same income: 15%
- FITO claimed: capped at 15% (Australian liability)
- Remaining 15% French tax: wasted — not refundable
Australian Super Funds and Tax Treaties
Australia has tax treaties with many countries (US, UK, Japan, Germany, France, etc.) that reduce the withholding tax rates on dividends, interest, and royalties paid to Australian super funds. These treaties work to limit the foreign tax, reducing the wasted credit problem.
Pension Phase: 0% Fund Tax
In pension phase, the fund’s Australian tax rate on earnings is 0%. This means:
- There is no Australian tax to offset the FITO against
- Foreign withholding taxes paid are simply a cost to the fund — they cannot generate a credit
- This is one of the reasons pension-phase funds pay lower net returns on international assets than accumulation-phase funds in some scenarios
Franking Credits for Domestic Investments
For Australian share investments, the equivalent mechanism is imputation (franking) credits — not a foreign tax credit. Franking credits are discussed in Super Tax Treatment.
For more: Super Tax Components, International Shares Super Option, SMSF Annual Return. For advice on international investment tax inside super, speak with a licensed financial adviser via MoneySmart.