The treatment of foreign income by deemed Australian tax residents can often be confusing.  Below is a basic guide to navigating through these murky waters.

Firstly you need to know whether you are a resident of Australia for tax purposed as it is not necessarily the same as being an Australian resident for other purposes.  Generally, an Australian resident for tax purposes is someone who’s usual place of abode is in Australia.

You need to know that you don’t need to be an Australian citizen or a permanent resident for immigration purposed to be considered a tax resident.  You could still be an Australian citizen and still be considered a foreign resident.  The best way to determine if you are tax resident would be to contact Venta to determine the circumstance per individual case as there are many different tests and legislation considerations to be determined.

Note that if you are a working holidaymaker, you’ll usually be considered a foreign resident for tax purposed and taxed at a rate of 15% on the first $37,000, you earn in Australia, with the balance then taxed at ordinary rates.

Now as an Australian resident you are taxed on worldwide income, meaning you are expected to declare all your Australian income and all your overseas income too.  Some of the main types of income you will need to declare in your income tax return is interest on overseas bank accounts, foreign pensions, rent derived from investment properties, capital gains from disposing of foreign assets such as rental properties, any employee share schemes from overseas companies and all wages earned in other countries.

There are penalties and fines if you fail to declare any of your foreign income, it typically is between 25% and 95% of the tax avoided, plus over 9 per cent interest on unpaid tax for the period it has not been declared.  When declaring foreign income you must convert the foreign currency into Australian dollars, as without the translation into Australian dollars the disclosure will not be correct.  To plan ahead the Australian Tax Office (‘ATO’) have many tax treaties with multiple countries to prevent double taxation.  Since your foreign income will be taxable, generally there will be a tax offset for the foreign tax paid against your Australian Tax, however only if you have paid tax overseas on your foreign income.

You may be entitled to claim tax offset for the foreign tax you paid on income, profits or gains that are included in your Australian assessable income. In some circumstances, the offset is subject to a limit.  To be entitled to a Foreign Income Tax Offset (‘FITO’) you must have actually paid, or be deemed to have paid, an amount of foreign income tax and the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes.

Your FITO is first applied against your tax payable for an income year.  If any FITO remains after that, you can use it to reduce your liability to pay Medicare levy.  Then if there is any further remaining FITO, you can reduce any liability to pay the Medicare Levy Surcharge for that income year.

The ATO knows everything and that is because the days have come where technology rules us. The ATO have developed electronic technology to undertake data matching whereby they receive income information electrically from third parties in Australia such as banks and tax authorities overseas.

Most institutions which pay interest and dividends, as well as wages are summarised by employers and pension funds to be recorded and matched with information declared on income tax returns.  The Australian government even monitors information on funds moving in and out of Australia through its AUSTRAC system and shares the results with the ATO.

If you are curious on whether you have overseas income that you are not sure about, it would be wise to contact one of our tax consultants at Venta Belgarum Associates to determine if you are declaring all the necessary overseas income.

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