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Credit for Foreign Tax on Foreign-source Income Subject to Australian Tax

17.19. Section 23 (q) of the Act has no application to a foreign-source dividend received by an Australian resident: such a dividend is subject to Australian tax. But section 45 allows a credit to an Australian resident who receives a foreign-source dividend in respect of income tax imposed on that dividend by the country in which the company paying the dividend is resident, if the Australian resident was personally liable for that tax. The credit is the lesser of the foreign tax or the Australian tax on the dividend, calculated by applying the average rate. By its terms section 45 is applicable both to an individual and to a company. In fact, however, it is relevant only to a dividend received by a resident individual: as indicated in 17.17, no Australian tax against which credit might be given is imposed on a foreign-source dividend received by an Australian resident company.

17.20. Section 23 (q) has no application to income derived by an Australian resident from sources in Papua New Guinea. Such income is subject to Australian tax. However, Division 18 of Part III of the Act allows the Australian resident a credit for Papua New Guinea tax against his Australian tax. The credit is the lesser of the Papua New Guinea tax and the Australian tax. For the reason explained in the last paragraph, the credit has no relevance to a dividend with a Papua New Guinea source received by an Australian resident company.

17.21. Section 23 (q) has no application to royalties or interest received by an Australian resident when the source of the royalties or interest is in a foreign country with which Australia has a double taxation agreement and when, in addition, that agreement has the effect of limiting the rate of tax the foreign country may impose on the gross amount of the royalties or interest. The foreign countries involved are United Kingdom, Singapore, Japan and New Zealand. The rate as limited by these agreements, if the agreement applies to the particular royalties or interest, 10 per cent in all cases except royalties having a New Zealand source, in which case the rate is 15 per cent. By section 12 of the Income Tax (International Agreements) Act, a credit against Australian tax is given, the amount of the credit being limited to the amount of Australian tax on the royalties or interest.

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