If you’re an Australian resident for taxation purposes, don’t forget you’ll need to declare any income you earn from overseas in your Australian tax return. Foreign income is commonly known as your ‘worldwide income’. This includes and income you receive from:
- Salary and wages
- Director’s fees
- Consultancy fees
- Business income
- Assets and investments
- Pensions and annuities
- Income from super funds
- Some government pensions
- Business activities
- Employment and personal services
- Assets and investments
- Capital gains on overseas assets
- Attributed trust income.
Are you an Australian resident for tax purposes?
Being an Australian Resident for Taxation Purposes is a little different than being just an ‘Australian Citizen’. Generally, you will be considered an Australian resident for tax purposes if Australia is your permanent home. This includes if you have always lived in Australia or have moved here permanently.
You can also be a resident if you have been physically present in Australia for more than half of the tax year (more than 183 days), unless your permanent home is overseas.
Another way to be a resident is if you have come to Australia on a long-term basis, such as being an international student enrolled in a course that lasts more than 6 months. Living in Australia for your studies with the intent to stay makes you a resident.
The Australian Tax Office also looks at four main legal tests – where you reside, where your permanent place of abode (home) is, how long you spend in Australia each year, and whether you are eligible for Australian superannuation. If you meet the criteria of any of these tests, you will generally be considered an Australian resident for tax purposes.
Declare tax paid on income overseas in your tax return
If you have paid tax on income you earned in another country, you may be entitled to claim that tax paid overseas to offset the tax you pay in Australia on that same income. This is called a foreign income tax offset.
To claim the offset, you must have actually paid tax on that income in the other country. You need to have proof, like tax returns or payment receipts, showing the foreign tax actually paid.
The offset amount does not always match the exact amount of foreign tax paid though. There is a calculation involved to determine how much of an offset you can claim in Australia.
If you are claiming over $1,000 in foreign income tax offsets, you will need to complete some additional calculations, using a Foreign Income Tax Offset Limit worksheet from the Australian Tax Office. This is to figure out exactly how much of the foreign tax paid can be used as an offset against your Australian tax amount.
The foreign income tax offset helps prevent you paying double tax on the same income earned overseas, as long as you have documentation to prove the foreign tax was paid.
Tax exemptions for international employment income
If you do some types of work overseas while still residing in Australia, you may be able to exclude that international employment income from having to pay tax in Australia. This only applies in certain limited situations though, such as if you are doing foreign government service, working on an approved overseas development project, or employed by certain international bodies like the United Nations.
You can also potentially avoid Australian tax if you are deployed overseas as part of the Australian Defense Force or working jointly with the US on space/defense initiatives. Each exemption has specific eligibility rules around the type of work, your employer, and how long you are overseas. If you think your foreign employment may qualify, you can check the Australian Taxation Office website for more details on the different exemptions available and what conditions must be met.
Convert into Aussie Dollars when declaring your foreign income
When filing your Australian tax return, any income earned overseas or foreign tax offsets claimed must be converted to Australian currency. The exchange rate used will depend on the nature of the foreign income and your individual circumstances. For some types of income, you must use the specific exchange rate on the day the income was received.
However, the ATO also allows the use of an average exchange rate for the financial year, if this method is more appropriate. It is important to apply the correct exchange rate method according to your situation and the type of overseas income received, so that your foreign amounts are accurately converted to Australian dollars for tax purposes.
Be sure to keep records of exchange rates used for currency conversions.
Pro Tax Tip: Many other countries have different tax years than Australia, which runs from 1 July to 30 June. So if you earn income in another country, their tax year may not match up neatly with the Australian financial year. This can mean you need to split or divide your foreign income and tax amounts over multiple years on your Australian tax returns to match up with our financial year.
Audit and verification checks on foreign income
The ATO carefully checks tax returns that are submitted. They compare the information you provide against data received from other sources, such as banks, financial institutions, employers and investment bodies. The ATO also exchanges financial account details with tax authorities in other countries.
This means they can see if you have declared all of your income sources, including any money earned or financial accounts held overseas. They may contact you if your tax return does not match the records they receive from these third parties. It’s important that your bank and other financial institutions have your correct name, address and Tax File Number on file. This helps avoid unnecessary follow-up from the ATO or foreign tax offices if any details are inconsistent.
If you have bank accounts or investments in foreign countries, you need to declare all of the income and capital gains from these sources on your Australian tax return. Failing to do so could result in penalties and interest charges from the ATO. They are working closely with international tax authorities to ensure Australian residents are complying with tax obligations both here and abroad.
Declaring foreign income on your Australian tax return can be a complex process that requires keeping detailed records and performing calculations across multiple years and currencies. Ensuring you report all of your overseas earnings correctly is important to avoid penalties from the ATO. While doing your own tax return is possible, the risks of errors that could lead to an audit are high when foreign income is involved.
For the peace of mind of knowing your international tax obligations have been fully met, consulting a registered tax agent is highly recommended. A tax professional has expertise in international tax law and experience navigating the unique requirements for declaring foreign income. They can help unpack your financial records and guide you through the process, giving you confidence your tax return is accurate.