An Australian resident is required by law to declare any foreign income in their Australian tax return, irrespective of whether it is assess-able or exempt. Unless you are a temporary resident of Australia, any income derived from a foreign source will be taxable in Australia. Foreign income is defined by the Australian Government Taxation Office as
- Foreign pensions and annuities
- Foreign employment income
- Foreign investment income
- Foreign business income
- Capital gains on overseas assets
Foreign income may also be taxed by the country in which it was earned and is potentially subject to double taxation. In order to overcome this, the Australian Government Taxation Office has a system of credits and exemption. However, the rules require that you include the full entitlement to income in your return (i.e: gross income), before any foreign tax has been deducted. The foreign tax paid can then be used as a credit against Australian tax payable on that foreign income to prevent double taxation occurring.
In order to be entitled to claim a credit or deduction you must have actually paid, or be deemed to have paid, an amount of foreign income tax and that the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes. The credit is limited to the lesser of the Australian tax payable on the foreign income or the foreign tax deducted overseas.
Should you have any expenses associated with your foreign investment income, these can be claimed as tax deductions against your foreign income, but there is a limit to what you can claim a year. If your expenses exceed your foreign income, then the deduction allowed will be limited to the amount of foreign income you have received.
Remember that when calculating your foreign income and deductions, you must convert all your foreign income, deductions and tax paid into Australian dollars according to the exchange rate provided by the Australian Government Taxation Office.
Ensuring that you keep adequate records of your foreign income and taxation paid will help when it comes to submitting your Australian taxation return. Having a tax agent such as Proactive Accounting and Financial services will be beneficial to you we can apply for an extension for lodgement of your return and help with the conversion from foreign exchange rate to Australian dollars.
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