Under Australian taxation laws, a resident of Australia is liable, subject to exceptions and exemptions, to Australian income tax on their worldwide income or income from a foreign source.
If an Australian resident receives income or other taxable amounts from a foreign source in or outside Australia, they are required at the end of each financial year to declare in their tax returns the amount received including any capital gains.
Individuals may be liable to income tax on their foreign-source income. To prevent individuals from being taxed twice on their foreign-source income (once in the foreign country and again in Australia) the Australian Taxation Office (ATO) offers a credit called the Foreign Income Tax Offset (FITO). This offset is for the foreign tax paid on their foreign-source income, which is now included in their Australian assessable income in their tax return.
Non-disclosure or undeclared foreign-source income places the individual at risk of penalties (penalty tax) between 25% to 75% of the amount of tax avoided in addition to the tax required to be paid. The amount of penalty tax depends on the nature of the non-disclosure – whether the individual was careless or had intentionally misled the ATO.
The seriousness of the offence can be lessened by making an upfront and full voluntary disclosure to the ATO but it has to be submitted by a tax lawyer to ensure that unwelcome consequences are avoided.
An individual is generally liable to income tax if they are an Australian resident for tax purposes. An ‘Australian resident’ includes a person:
who has a place of residence or home in Australia,
who has actually been in Australia continuously or intermittently, during more than one-half of the year of income (financial year – 1 July to 30 June)
who is a member of a superannuation scheme or is a dependant covered by a superannuation scheme under the Superannuation Act 1990.
An individual is not an ‘Australian resident’ if it can be proven that the individual’s permanent place of residence or home is outside of Australia, and/or the individual does not intend to take up residence in Australia.
The definition of an ‘Australian resident’ also extends to companies:
incorporated in Australia, or
not incorporated in Australia but carries on business in Australia, and
has either its central management and control in Australia, or its voting power controlled by shareholders.
Income or other taxable amounts from a foreign source
Some of the income or other taxable amounts from a foreign source that an individual (or taxpayer) can derive may include (but is not limited to):
Foreign pensions and annuities
Foreign employment income
Foreign investment income
Foreign business income
Foreign trust income
Capital gains from disposal of overseas assets where no exemption applies
Interest on an offshore bank account
Foreign-source investment income eg). dividends
Royalties from foreign assets
Income derived from inherited overseas assets
Income attributed to a taxpayer arising from interests in offshore entities even where the income has not been distributed
Foreign Income Tax Offset (FITO) The FITO is claimed in the individual’s income tax return.
To be entitled to a FITO:
you must have actually paid, or be deemed to have paid, an amount of foreign income tax.
the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes.
‘Foreign income tax’ is a tax on income, profits or gains (income or capital), or any other tax that is covered by the International Tax Agreements Act 1953. Some of the types of foreign tax that are not considered to be ‘foreign income tax’ and do not count towards a foreign income tax offset are but not limited to:
annual wealth taxes
net worth taxes
taxes based on production
taxes payable only because of entitlement to FITO in Australia
penalties, fines and interest
In Australia, the taxation year is based on 1 July to 30 June, whereas many countries operate by the calendar year.
The differences between the Australian and foreign tax systems may lead to individuals paying foreign income tax in a different year from the year the income is included in the individual’s assessable income for Australian income tax purposes.
If an individual has paid foreign income tax after the year in which the related income have been included in their Australian tax return, that individual can claim the offset by requesting an amended assessment for that year. The individual has up to four years to request an amendment to their assessment from the date they paid the foreign income tax.
A request for an amendment should be made if there is an increase or reduction in the amount of foreign income tax that individuals have paid that counts towards the offset.
Target foreign income must also be declared.
Target foreign income is any income, gifts or allowances from a source outside Australia; and that is not:
taxable income (assessable income minus deductions) under the Australian income tax legislation, or
received in the form of a fringe benefit
Examples of target foreign income include:
regular receipts of money and gifts from relatives living overseas which are exempt from Australian tax
foreign-source income received while you were a temporary resident that is exempt from Australian tax
In addition to not declaring foreign-source income in tax returns, non-disclosure may arise through:
accumulating the income in an offshore bank account;
accumulating or reinvesting income in other assets or entities offshore;
transferring funds to the taxpayer through the use of purported loan arrangements; and/or
accessing funds in an offshore bank account through the use of debit or credit cards by the taxpayer in Australia or elsewhere
If you have any enquiries or wish to receive further information, please contact:
Wentworth Lawyers & Partners
Executive Lawyer / Insolvency Practitioner / Registered Migration Agent M +(61) 410 626 909 / Internet mobile 070 7884 7435 / T 1300 577 502 / E firstname.lastname@example.org / Level 13, 2 Park Street, Sydney NSW 2000 / www.wwlp.com.au
Disclaimer: This publication is intended only to provide a summary of the subject matter covered. It is not intended to be comprehensive or to provide legal advice. Consult a legal professional.