If you're an Australian resident for tax purposes, your worldwide income is assessable in Australia. The Foreign Income Tax Offset (FITO) prevents double taxation by giving you a credit for foreign tax already paid on the same income. The offset is the LESSER of: foreign tax paid (translated to AUD), OR the Australian tax attributable to that foreign income.

The 'Australian tax attributable' calculation uses an apportionment formula: Australian tax on (AU income + foreign income) minus Australian tax on AU income alone. If the foreign country's tax rate is lower than your Australian marginal rate, you get the full foreign tax credit and pay top-up tax in Australia. If the foreign country's tax rate is higher (think Germany on dividends, Japan on rental income), the excess foreign tax is lost — Australia doesn't refund it and you can't carry it forward.

For taxpayers with total foreign income tax of $1,000 or less in the year, you can claim the FITO without the apportionment cap calculation — just the foreign tax paid. Above $1,000 the cap applies. Tax treaty positions can override the FITO outcome in specific cases (especially for pensions, royalties, or dividends from treaty countries) — for those, the treaty article governs.