Whether you are an individual earning foreign income or if you are an Australian resident doing business in foreign countries, you must declare your foreign income in your tax return along with your Australian income sources.
As an Australian business or sole trader, keep in mind that your foreign income is probably taxed in the source country. Declaring its value in Australia will help you avoid potentially having to pay double taxes.
The Australian government has signed treaties with more than forty countries, some of which are Australia’s major trade partners. These tax treaties help to win exemptions and credits for citizens and businesses that could potentially be paying double tax otherwise. Credits can be used against the Australian tax payable so that you can avoid paying double tax.
What should I declare as foreign income?
As a sole trader, company or partnership, you must declare as foreign income any income that belongs to the following categories:
- Income from foreign investments
- Capital gains on overseas assets
- Foreign business income
- Income from foreign pensions and annuities
- Your earnings from foreign employment can also be declared
As a business entity, you must also include an international transactions schedule with the tax return. This schedule must be included for a company, trust, partnership or superannuation, if the transaction value is over $2 million and when you’ve completed labels like the interest expenses overseas label.
What are the taxation rules for subsidiaries in a foreign country?
If your Australia-owned business has established a subsidiary overseas, it will usually be treated as a foreign resident when it comes to the Australian tax law. If the subsidiary passes the active income test, you don’t have to pay taxes on its passive income, sales income, tainted services and some other forms of income.
If the subsidiary fails the test (for example, if less than five percent of its revenue can be considered potentially attributable turnover), it may be taxed under the Controlled Foreign Company (CFC) rules. This means you may have to pay taxes on certain kinds of income like interest and dividends.
Subsidiaries in listed countries, like the UK, that are taxed under CFC rules enjoy certain tax advantages, as compared to those in unlisted countries.
Are capital gains taxable?
Sole traders who make capital gains on overseas assets will have the same tax rules apply as that on capital gains on Australian assets. Again, make sure you’re not paying double tax on your overseas capital gains.
If you operate an Australian company and dispose of shares in active foreign companies, you may enjoy capital gains and loss concession.
What are exempt foreign business incomes?
For Australian-resident businesses, some foreign business incomes are exempt from tax, including:
- Active overseas permanent establishments, where the Active Income Test is satisfied
- Equity distributions (in foreign companies where you had at least 10% participation interest) made after 16 October 2014
- Dividends from a foreign company earned before that date, as long as you have at least 10% participation interest
- Converting Foreign Income to AUD
Note that before you declare your income, you must convert all your foreign income, foreign tax paid and any deductions into AUD. To do this, you can:
- Use the average exchange rate, or
- Use the daily rate, or
- Use the exchange rate that applicable at specific times, such as those used in an audited financial report
For more information on foreign income taxes in Australia, including registering for GST as an exporting enterprise, complex rules relating to foreign currency accounts and more, you should seek advice from a tax advisor such as Femia Accountants.
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