If you are resident in Australia for tax purposes, then you are taxed on your worldwide income. The ATO is concerned that some Australian residents may not be correctly reporting their foreign income, often because they are unaware that their overseas income needs to be reported here.
Governments are sharing a lot more information now and digital communications makes it much faster and easier to do this. The ATO states that the Common Reporting Standard now allows them to share data with over 65 foreign countries. If you own property, shares or have a bank account overseas, then you need to declare any income on your Australian income tax return.
Normally it is quite straightforward as to whether you are an Australian resident for income tax purposes or not. Note, though, that tax residency is not the same as residency for Centrelink purposes or citizenship. If you are in any doubt, there are four tests that the ATO can apply to determine whether you are resident or not and if you are still unsure, please see a tax professional for assistance.
Taxable foreign employment income
Some foreign employment income is exempt in Australia (more on this below), but most people who earn money from overseas employment while they remain resident here will pay tax here. Provided the country where the money was earned has a double tax agreement with Australia, then you will be able to claim a foreign tax credit for any tax paid in the foreign country. Your foreign tax credit cannot exceed the amount of Australian tax that would apply to your foreign income, so if you paid tax in a high tax jurisdiction, then you will lose some of the benefit, but if you were in a low tax jurisdiction then there may be additional tax to pay.
Exempt foreign employment income
Foreign employment income is only exempt from Australian tax if it meets the following criteria:
- The employment was for at least 91 consecutive days; and
- It was directly attributable to any of the following:
- Delivery of Australian Official development assistance (unless you are a public servant)
- Activities of your employer operating a developing country relief fund or public disaster relief fund
- Activities of your employer being a prescribed charitable or religious institution exempt from Australian income tax
- Deployment outside Australia by an Australian government as a member of a disciplined force
If your income is exempt foreign income, it will still need to be declared on your Australian tax return as it will impact the amount of tax you pay on your Australian income.
Foreign pensions and undeducted purchase price (UPP)
If you receive a pension from overseas then it will be taxable in Australia. In some cases where tax has been withheld, you may have to apply to the overseas country to get the tax refunded. If the pension was one that you paid your own money into, then you will be entitled to a credit for the money you contributed. Usually you will have to apply to the ATO for a private ruling to determine the amount of the pension that comprises the UPP. This may be provided as a percentage or a fixed amount in the original currency. Some state pensions (UK, the Netherlands) have a predetermined amount that you can apply if you prefer.
The franking credit system applies only to dividends from Australian companies and some New Zealand companies. Dividends paid by other overseas companies will have no franking credits attached, although a credit may be able to be claimed for any foreign income tax deducted from the dividend.
As a resident, any capital gain on foreign assets will be taxable here. If it was an asset you owned prior to becoming resident, then your cost base will be market value on the date you became a tax resident, unless it is a pre-CGT asset (acquired before 20 September 1985). Capital gains on foreign assets are not treated as foreign income, but reported together with any gains on Australian assets.
Foreign income tax offset (FITO)
Because the tax treaties are long and written in opaque legal language, the ATO has released a ruling listing the specific taxes from each country which are considered to be income taxes and can be used as a credit against Australian tax. The ruling is IT 2437.
If you are claiming a FITO and the amount is $1,000 or less, then you simply record the actual amount of foreign tax paid. If you are claiming more than $1,000 ten you will need to calculate the amount you are entitled to. If you go to a registered tax agent to get your tax prepared, the agent’s software will calculate this for you.