Issue:

Users cannot lodge the tax return when entering capital gain from a foreign property sale (e.g., UK property) only in the Capital Gains section without properly reporting the associated foreign income tax offset. This leads to validation error CMN.ATO.IITR.731359, which is mandatory for electronic lodgement by the ATO.

Background:

The ATO requires foreign capital gains and related foreign income tax offsets to be reported in conjunction with the appropriate foreign income worksheets. While foreign capital gains may appear to be correctly reported in the Capital Gains section, the ATO system does not allow lodging electronic returns with a foreign tax offset claimed unless the foreign income is declared in the foreign income section or related foreign worksheets.

Key Points and Solution:

  1. Mandatory ATO Rule CMN.ATO.IITR.731359: This rule enforces that foreign income tax offsets must be associated with foreign income entries for lodgement to succeed.
  2. Where to Report Foreign Capital Gain and Foreign Tax Offset: Fill any foreign income worksheet with the amount of the foreign capital gain income AND the foreign tax offset. Alternatively, report the capital gain in the Managed worksheet or Trust Distribution worksheet if applicable. These reporting options are the only ones allowing foreign income tax offsets to be claimed correctly in LodgeiT.
  3. Capital Gain Section Limitations: The capital gain can be recorded in the Capital Gains section per ATO instructions, but lodging electronically with a foreign income tax offset linked only there is not permitted by the ATO system. The electronic lodgement validation will fail unless the foreign tax offset is backed by corresponding foreign income reported in one of the foreign income worksheets.
  4. Referencing ATO Instructions: The ATO’s paper tax return instructions, for example in “Part H” of the supplementary tax return instructions, refer to foreign income and offset reporting and confirm that the ITR form includes item 20O for foreign income tax offset. See ATO guidance: Foreign Source Income and Foreign Assets or Property – 2024

Related Guide: CMN.ATO.IITR.731359