Foreign income.  An area which can cost the uninitiated dearly.  Many (many) years ago, it was simple, if you worked and earned money overseas, and it was taxed in that jurisdiction, broadly speaking, that income was exempt from tax in Australia.  Fast forward 10 years or so and it’s a different story.  So here’s a summary to try and help you avoid the surprise pitfalls of working away.

If you have been working in a different country, you need to be aware the money you made while you were working needs to be declared as income on your income tax return.  This is quite simply because Australians are taxed on their worldwide income and that café shop you were working at while you were studying in America or your company sending you to London to work in the London office is classified as income.

If you are an Australian resident and you have derived income from overseas, you need to declare it in your Australian tax return.  To determine whether you are an Australian resident for tax purposes, the below needs to be considered.

This may be different to your residency status for other purposes. For example, you could be an Australian resident for tax purposes even if you’re not an Australian citizen or permanent resident.

Please be aware there are specific tests to determine your residency, the above is just the basic criteria.

If you have a Higher Education Loan Programs (‘HELP’), Trade Support Loan (TSL) or VET Student Loan (VSL) debt you are also likely to need to declare your worldwide income. This may include income which is normally ignored for working out your income tax obligations.

As we have mentioned before, as an Australian resident for tax purposes, you must declare income you earn anywhere in the world on your Australian tax return. So what is “worldwide income”?. Very broadly, it is income you may receive from the below list, from anywhere in the world:

If you receive income in a foreign currency you will need to convert it to Australian Dollars using an Australian Taxation Office (‘ATO’) certified exchange rate (e.g. Commonwealth of Australian Bank Exchange Rates).  There may also be income on the unrealised and realised gains and losses caused by currency exchange differences and the timing of the foreign payment and the conversion to Australian dollars.

It’s not all bad news however.  If you have already paid tax in the country you received this income, you may be entitled to a foreign income tax offset credit.  To be eligible for this offset you need to have paid the tax and have the records to prove it.   If you have lodged a tax return in the country you were living in, you should keep this copy for your records to help determine the offset amount you are entitled to.  The entitlement will not always be the same as the amount of tax paid in the other country.  If you are claiming more than $1,000 you will need to complete the foreign income tax offset limit calculation to determine your entitlement.  Sometimes we see clients who have paid tax in the foreign country also having to pay “top-up” tax in Australia.  This may be due to many factors including the foreign jurisdiction’s lower tax rates, Australia’s requirement to pay Medicare Levy and Medicare Levy Surcharge or repayments to be made on HELP or other study loans.

In some instances you may be in the unfortunate position of paying double tax, that is tax in the country you earned the income AND tax again in Australia.  To overcome this, Australia has a system of credits and exemptions together with signed tax treaties with more than 40 countries including all our major trade and investment partners.

We are currently seeing many clients returning to Australia as a result of the COVID-19 pandemic, many with outstanding income tax returns.  They were unaware of the consequences but have been guided and assisted in straightening up their tax compliance.   These cases are unfortunate but preventable if adequate tax planning is put in place.  At the end of the day, it is much easier to plan for these events rather than try to fix them up afterwards.  It is for this reason we advise you to speak with an experienced tax specialist who can guide you and plan your tax compliance.  We are know with the advent of technology how easy it is to prepare your own tax return however, the knowledge a tax specialist can give you is invaluable.  If you or someone you know needs assistance, please don’t hesitate to refer them to us so we can help them with their upcoming tax compliance.

Any questions or concerns you may have can be solved and stress can be taken away with just one meeting with one of our tax specialists.

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