Calculating foreign tax credit

[unborderedlife]

I tried just entering the foreign dividends in the 外国税額控除 section along with the interest, and it calculated my foreign tax credit as 3,700 yen, which is far lower than what I got when doing the calculation in Excel.

unborderedlife,

Does the treaty to avoid double taxation between Japan and Australia says that you will not be double taxed?
The 8k out of 12k tax, seems close to double taxation. Perhaps there is some wrong input in that e-tax form?
If not, can you claim for your 8k back by referencing the treaty?

What happens if you remove the fact that you already paid that tax, does the amount they credit you go down to 0? Just making sure, we're getting
the correct form fields.

When you find out the reason for the discrepancy, can you please let us know the reason?

The foreign tax offset seems to only be affected by the total foreign income earned, playing around with values of tax already paid doesn't seem to affect much. But I may have remembered wrong so will check again.

[Tkydon]

Hi, sorry I just saw this as I am once again doing my taxes and confronted with the same issue.

Are you saying that Japan will only provide a Foreign Tax Credit for tax paid in Australia to a maximum of 10%, regardless of how much tax I actually paid?

Assuming that is so, the Foreign Tax Credit calculated by e-Tax is still far lower than 10% of the my foreign Aus income. For example, this year I earned the equivalent of around 100,000 yen in dividend+interest income, and paid around 30,000 yen in tax to the ATO. (I am currently taxed by Australia at 30% for dividend income, and 10% for interest income. Which is the standard rate for non-residents after filing an annual tax return with Australia.)

Even if the NTA only returns 10% as foreign tax credit, I should get around 10,000 yen back. But after entering the values, it only calculates around 6,000 yen, which is like 5%. Can you think of any reason why?

BTW, even if I submit a form with my broker to have tax withheld on dividends, am I even able to qualify for 10% withholding tax if I am not a resident for tax purposes in Australia?

https://www.ato.gov.au/business/payg-wi ... ts/?page=5

https://www.ato.gov.au/individuals/work ... variations

https://www.ato.gov.au/Forms/PAYG-withh ... plication/


If you are an Overseas Resident Australian Citizen you have to claim the Reduced Rate of Withholding on Aus Dividends in Australia by completing the PAYG Withholding Variation Application (Online or Paper NAT 2036) every year to reduce the amount of any pay as you go (PAYG) tax withheld from income paid to you in the application year, and the payer (Aus Broker, etc.) can't vary the withholding rate until they receive an official variation notice from the ATO. You can submit the application in April for the following Tax Year starting in July.

If you paid 30,000 yen in tax to the ATO then you have NOT completing the PAYG Withholding Variation Application (Online or Paper NAT 2036), and are still being charged tax at the 30% Withholding Rate.

Under the terms of the Aus-Japan Tax Treaty, they will then withhold 10% Withholding Tax and you will only be liable for 10% on the Dividends instead of 30%

http://www.mof.go.jp/tax_policy/summary ... n-AUEN.pdf

Article 10 - Dividends
According to Article 10, Paragraph 2(b), as a Resident of Japan for Tax Purposes, you should be able to claim a reduced amount of Withholding Tax on Dividend Income in Australia of 10%, instead of the standard 30%.

Article 11 - Interest
According to Article 11, Paragraph 4, as a Resident of Japan for Tax Purposes, you should be able to claim a reduced amount of Withholding Tax on Interest Income in Australia of 10%

It is this 10% Withholding on Dividends and Interest that you can claim as the Foreign Tax Credit against Dividend Taxes and Interest Taxes in Japan. Other income and other taxes are subject to different articles, and you may or may not be able to claim that other Aus Tax as a Foreign Tax Credit against other income.

So you should be able to get 20,000 of the 30,000 back from ATO.
You can then get the other 10% back from Japan NTA.

In order to get the Separate Tax Method Dividend Tax Rate of 20.315%, you MUST complete Page 3 第三表 of the Kakutei Shinkoku.
Otherwise you will be automatically selecting the default Aggregate method and the Dividend Income will be taxed at your Marginal Income Tax Rate.

The 10% Tax Withheld should be clearly shown in your Brokerage Statement or Year End Tax Report from your Aus Broker. (remember Aus and Japan Tax years do not align, so you will have to provide that actual Jan - Dec transactions across Aus Tax years' statements).

When you do your National Taxes, and Separate Method Dividend Tax, then they are Only calculating the National Tax 15.315% part of the total. The other 5% will be charged next year in your Residents' Taxes.

You need to complete the PAYG Withholding Variation Application (Online or Paper NAT 2036) Every Year to reduce the amount of any pay as you go (PAYG) tax withheld from income paid to you in the application year, and the payer (Aus Broker, etc.) can't vary the withholding rate until they receive an official variation notice from the ATO. You can submit the application in April for the following Tax Year starting in July.
You can submit now for 2021-22 and in April for 2022-23.
I don't know if you can go back and submit a PAYG Withholding Variation Application for previous years, 2020-21, 2019-20, or earlier, if you were off-shore in those years. You would have to consult with the ATO.

[unborderedlife]

https://www.ato.gov.au/business/payg-wi ... ts/?page=5

https://www.ato.gov.au/individuals/work ... variations

https://www.ato.gov.au/Forms/PAYG-withh ... plication/

If you are an Overseas Resident Australian Citizen you have to claim the Reduced Rate of Withholding on Aus Dividends in Australia by completing the PAYG Withholding Variation Application (Online or Paper NAT 2036) every year to reduce the amount of any pay as you go (PAYG) tax withheld from income paid to you in the application year, and the payer (Aus Broker, etc.) can't vary the withholding rate until they receive an official variation notice from the ATO. You can submit the application in April for the following Tax Year starting in July.

If you paid 30,000 yen in tax to the ATO then you have NOT completing the PAYG Withholding Variation Application (Online or Paper NAT 2036), and are still being charged tax at the 30% Withholding Rate.

Thank you very much for the informative response, things are finally becoming clearer, but a few extra clarifications:

I am currently not having any tax withheld, I get taxed at the 30% rate when I declare the dividend income when filing my annual tax return with the ATO. This means that I currently cannot complete the PAYG Withholding Variation Application form as there is no withholding tax payer to modify.

I believe what I first need to do is submit a form for tax to be withheld on future dividend payments. As the dividend comes from ETFs, I think I need to contact Vanguard/Blackrock/etc. rather than the broker platform? What I don't understand is why tax has not automatically been withheld since I have declared tax residency status via Computershare years ago.

According to https://www.ato.gov.au/Individuals/Inve ... royalties/
it seems the financial institution should have withheld tax automatically based on that information, but was there another step I needed to do?

The 10% Tax Withheld should be clearly shown in your Brokerage Statement or Year End Tax Report from your Aus Broker. (remember Aus and Japan Tax years do not align, so you will have to provide that actual Jan - Dec transactions across Aus Tax years' statements).

Regarding this, when I consulted with the NTA last year, they said it was fine to input the ATO assessed income/tax based on the Australian FY even if it doesn't align with the Japanese FY.

[Tkydon]

I don't know why you are currently not having tax withheld.
I would suggest you first raise that question with your Broker.

Then, you would need to contact the ATO, point out that you are resident in Japan for Tax Purposes and therefore are covered by Article 10 Paragraph 2(b) and Article 11, and under the terms of the treaty should only be taxed 10% on Dividends and Interest Income.

[Tkydon]

On the Foreign Tax Credit:
It is not the percentages that matter, but the actual value of the Tax Withheld.
The Tax Treaty means the Foreign Govt withholds 10% of the Gross
Say Gross Dividends is Y100,000
Then the Withheld Tax would be 10% = Y10,000
So, you file for Separate Tax Method, so the National Tax is 15%
So they charge you Tax on the Y100,000 at 15% = Y15,000

You claim the refund of the Y10,000, but the way the Foreign Tax Credit works is
They provide you with a Deduction that goes back into the list of Allowances and Deductions, that reduce you Gross Aggregate Taxation Income to compensate you for the Y10,000.

Now, depending on which Tax band you are in, the deduction of some value from you taxable income, will also result in the reduction of the amount of Taxable Income in your Marginal Income Tax Band, resulting in the reduction of tax of Y10,000)

So, say you are in the 20% Tax band, they only need to provide a deduction of Y10,000 / (1+ 20% National Tax + 0.42% Reconstruction Tax + 10% Residents' Taxes) = Y7,667 and you will also see a reduction in National Tax of the 20%, 0.42% Reconstruction Tax and 10% Residents' Taxes of the tax on the Y7,667 = Y2,333 for a total of Y10,000
As a percentage of the original Y100,000 that is 7.67% Foreign Tax Deduction

So, say you are in the 33% Tax band, they only need to provide a deduction of Y10,000 / (1+ 33% National Tax + 0.69% Reconstruction Tax + 10% Residents' Taxes) = Y6,959 and you will also see a reduction in National Tax of the 33% and 0.69% Reconstruction Tax and 10% Residents' Taxes of the tax on the Y6,959 = Y3,041 for a total of Y10,000
As a percentage of the original Y100,000 that is 6.96% Foreign Tax Deduction

If you are lucky enough to be in the 40% Tax band, they only need to provide a deduction of Y10,000 / (1+ 40% National Tax + 0.84% Reconstruction Tax + 10% Residents' Taxes) = Y6,630 and you will also see a reduction in National Tax of the 40% and 0.82% Reconstruction Tax of and 10% Residents' Taxes the tax on the Y6,630 = Y3,370 for a total of Y10,000
As a percentage of the original Y100,000 that is 6.63% Foreign Tax Deduction

So, the lower amount of deduction results in the correct amount of tax cut to compensate for the Y10,000 of Overseas Tax withheld.

If for any reason, you do not have enough National Tax to provide the refund, then any excess will first be deducted from your Reconstruction Tax, but as this is very small, any remaining excess will be divided by 3 and deducted from your Residents' Taxes. Finally, any remaining can be carried over for a maximum of 3 years.

[unborderedlife]

I don't know why you are currently not having tax withheld.
I would suggest you first raise that question with your Broker.

Then, you would need to contact the ATO, point out that you are resident in Japan for Tax Purposes and therefore are covered by Article 10 Paragraph 2(b) and Article 11, and under the terms of the treaty should only be taxed 10% on Dividends and Interest Income.

I think I should contact the ETF fund manager (Vanguard, etc.) instead as they are ones paying out the dividends, so I'll do that and see what happens.

Thank you also for your detailed explanation on how the foreign tax offset is calculated, it helps a lot.

I have entered the dividends as 申告分離課税 but it seems there is no way to specify that for interest paid from overseas (it is automatically put into 総合課税).

I am in the 20% Tax band, so if I use your formula for the dividend income only (around 80,000 yen) the deduction amount of around 6,000-7,000 yen makes sense. Where can I see the reduction in National Tax?

However, in the 外国税額控除の入力 -> ２ 調整国外所得の計算 section, I have put the total amount of around 100,000 yen (dividends+interest) I received in AUD and paid tax on. Playing around with this figure does change the foreign tax credit, so it seems that this figure is used in the calculation. In which case, the deduction amount of around 6,000-7,000 yen is too low. Do you know what else could affect the amount of deduction calculated ?

[igzem]

I need to submit tax declaration next year too as it will be my 5th anniversary and declare income in Aus and Japan. On blog different platforms I can see different opnions. Some, I think, from qualified specialists, some are "I've done that scenarios".
Reading all the lingo which is hard to understand at times, are there any tax accountants/advisors who can be contracted in Japan with exposure to foreign customers? Any advice will be appreciated.

[Tkydon]

I found this one. No experience though.
https://ty-tax-accountant.com/

[igzem]

@tkydon
Thank you for accountant link

[hongononeko]

I'm also facing a similar situation, however, my taxes are automatically deducted from both sides. I don't care for the additional paperwork to get any tax credits and am happy with the double taxation (if any). Do I still need to report to each side what is happening? Rather not but worried I might get in trouble later.

Thanks for your advice.