Ever heard of the saying: Don’t put all your eggs in the one basket? Many Australians do just that, and have just one stream of income. Extra income earned may come from salary and wages, director’s fees, consultancy fees or other type of remuneration – some of which is foreign.
Foreign income is still counted towards your taxable income in the eye of the Australian Taxation Office (ATO), and you’ll need to declare it when it comes time to lodge your tax return. Tax on overseas assets and income is a complex area of tax law and certain exemptions will apply.
Income From Assets And Investments
All assets and investments from overseas will need to be declared. Forms of income include:
- Interest from bank deposits and bonds
- Dividends from shares
- Royalties from intellectual property
- Rental from real estate
- Pensions, annuities and lump sum payments from managed funds
- Income streams from overseas super funds
- Foreign government pensions.
What Happens If I Own An Overseas Asset?
Because you are an Australian citizen for taxation purposes, you’re required to pay Australian tax on overseas assets that you may have sold. The amount depends on when you acquired the asset.
If you acquired the asset prior to becoming an Australian resident, the ATO will count the asset at the time you became a resident. If you cease being an Australian resident whilst holding an overseas asset, the ATO deems you to have disposed of that asset at the same time.
Pro Tax Tip: Don’t forget to keep accurate records so that you can calculate the capital gain or loss of your asset.
Tax Paid On Overseas Income
Rest easy. You won’t have to pay tax twice if you’ve already paid overseas tax in the country you derived the income from. In fact, you may be entitled to a foreign income tax offset. In order to be eligible, you’ll need to already have paid tax on the overseas income and have your records to prove it.
The offset amount will depend on the amount of tax you’ve paid. If you claim more than $1,000, you’ll need to complete a foreign income tax offset limit calculation.
In order to correctly calculate the proper amount, all foreign income must be converted into Australian dollars. This can be the specific exchange rate on the day, or an average exchange rate. Rates are set by the Reserve Bank of Australia.
Pro Tax Tip: If you need to convert income or expenses prior to 1 July 2003, old conversion rate rules apply.
Daily exchange rates are updated at the beginning of the following month. If the ATO has not published an exchange rate, you can use an appropriate rate provided by a banking institution operating in Australia or another reliable external source.
Any foreign income could incur double taxation if tax is withheld in the source country. To overcome this issue, the Australian government has treaties with over 40 countries, and includes all major trade and investment partners.
Some countries operate on a different financial year than Australia. Australia operates on a fiscal year, which is 1 July through to 30 June, while others operate using a calendar year from 1 January through to 31 December. This means that foreign income amounts may need to be reported across multiple Australian tax years.
Pro Tax Tip: You should determine which Australian tax years the amounts should be reported and apportion. Your tax agent will be able to help you work this out.
There are some circumstances where foreign income is exempt from tax, but only if all of the following adhere:
- You need to be an Australian citizen for taxation purposes
- You need to be employed in a continuous foreign service as an employee for 91 days or more and your foreign service is:
- Australian official development assistance
- Operating a public fund by the Minister to a developing country fund
- Operating public fund to provide monetary relief to people in a developed foreign country impacted by a disaster
- If you work for a charitable or religious institution exempt from Australian tax because it is located outside of Australia, or pursuing activities outside of Australia
- Foreign deployment
I’m A Foreign Resident. What Do I Need To Do?
Any Australian-sourced income earned will need to be declared in your Australian tax return. This may include employment income, rental income, Australian pensions and annuities unless you’re exempt, and any capital gains on Australian assets.
Income earned from outside Australia will not need to be declared in your Australian tax return. As well as income, you also do not have to declare Australian-sourced interest, dividends or royalties you derive while you’re a foreign resident, provided you have already had tax withheld. This might not automatically occur, so you’ll need to let your Australian financial institution or company know.
You will not need to pay the Medicare Levy because you’re not entitled to Medicare health benefits. You can claim an exemption from paying the Medicare levy for the number of days in the income year that you are a foreign resident.
You are also not entitled to the tax-free threshold and will need to be pay tax on every dollar of income you earn in Australia.
If you promote or organise casino junkets, entertainment or sporting activities, or associated activities you are subject to foreign income withholding tax arrangements. Your payer will withhold tax but you will need to report this income when you lodge your Australian taxation return and claim the withheld amounts as a credit against tax assessed.
The ATO does receive information electronically from third-parties and will be pre-filled when you lodge your tax return. This information is from banks and tax authorities overseas. Income is monitored through AUSTRAC systems, which shares results with the ATO. This information is matched with tax declarations and tax returns and will be flagged if they are mis-matched.
Pro Tax Tip: Penalties will be applied if foreign income is not declared, and will typically be between 25% and 95% of the tax avoided, as well as over 7% of the interest on unpaid tax.
ITP Tax Accounting Professionals have helped Australian individuals and businesses for 50 years. There’s not a lot we don’t know about tax and finances. Phone 1800 367 487 and chat about your budgeting needs and how we can help you save on your tax dollar.