If you’re an Australian resident and you’ve earned income from overseas, you need to declare it in your Australian tax return.
This article explores the key considerations outlined by the ATO.
What types of foreign income must be declared?
Australian tax residents must declare all foreign income including:
- Income from employment and personal services.
- Income from assets and investments.
- Capital gains on overseas assets.
Income from employment and personal services
If you have worked overseas or in Australia for a foreign company, you will need to declare all such income.
This may include:
- Salary and wages.
- Director fees.
- Consultancy fees.
- Business income.
- Any other remuneration.
There are some specific circumstances in which foreign salary is exempt. Examples may include where the organisation you work for is pursuing charitable objectives outside Australia such as providing relief to people in a foreign country impacted by a disaster.
If your foreign service is not directly attributable to the specific activities outlined by the ATO, you need to include the foreign employment income in your tax return as assessable income.
You may be entitled to a foreign income tax offset for amounts of foreign tax you have paid.
Income from assets and investments
If you own assets or investments overseas you will need to declare all relevant returns as if they were in Australia.
This may include:
- Interest from bank deposits or bonds.
- Dividends from shares.
- Royalties from intellectual property.
- Rental income from real estate.
- Pensions, annuities and lump sums.
- Earnings from managed funds.
- Income streams from super funds.
- Some foreign government pensions.
Capital gains on overseas assets
If you own an asset overseas, you may have to pay Australian tax when you sell the asset.
- If you acquired an overseas asset prior to becoming an Australian resident, you are taken to have acquired the asset at the time you became a resident.
- If you cease being an Australian resident while holding an overseas asset, you are deemed to have disposed of that asset at the time you cease being a resident.
It is important to keep appropriate records of asset values at these times.
Things to be aware of at tax time
Australian tax residents need to be aware of several important factors when it comes to declaring their foreign income, to ensure that they comply with the law and can benefit from potential foreign income tax offset credits.
Tax paid on income overseas
If you have already paid tax in the country in which you derived the income, you may be entitled to a foreign income tax offset credit.
To be eligible you must:
- Have paid the tax on the income overseas.
- Have records to prove that the tax has been paid.
The offset amount you are entitled to will not always be the same as the amount of tax paid overseas. If you are claiming more than $1,000 you will need to complete the foreign income tax offset limit calculation to determine your entitlement.
Converting foreign income to Australian dollars
All foreign income and tax offsets must be converted to Australian dollars in your Australian tax return.
Depending on your circumstances and the type of income, you will need to use either the specific prevailing exchange rate or the average exchange rate.
Apportioning foreign income across multiple tax returns
Unlike Australia, most countries do not have an income year ending 30 June. This means foreign income amounts reported overseas and the associated tax offsets may need to be reported across multiple Australian tax returns.
You will need to determine which Australian tax years the amounts should be reported in and apportion accordingly.
If you’re an Australian resident and have derived foreign income, you need to declare it in your Australian tax return. If you fail to do so, this activity may be viewed as tax evasion or avoidance, and you could be liable to penalties and prosecution by the ATO and its partner agencies.