Whether you are an individual earning foreign income or if you are engaged i 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 international income?
As an individual, sole trader, company or partnership, you must declare as foreign income any income that belongs to the following categories:
- Income from overseas investments
- Capital gains on overseas assets
- Overseas business income
- Income from overseas pensions and annuities
- Your earnings from overseas 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.
Australian Taxes for Foreigners
There is no doubt that Australia is a favourite destination for foreigners for both business purposes and its lifestyle allure. As such, there are many foreign entrepreneurs and workers who migrate to Australia. As a foreigner, you should carefully consider some factors regarding Australian taxes regardless if you are an individual or business owner. Let’s take a quick look at what these entail.
Check on Double Tax Agreements
If you are a business individual or company wanting to business in Australia, you will have to apply for an Australian Tax File Number (TFN) and pay taxes in Australia. But whether you also have to pay taxes back home depend on whether the country you originate from has a tax treaty with Australia (also known as double tax agreements).
Small Business Discount Concessions
If you are setting up a small business, there are three common business structures you can consider: sole traders, partnerships and companies. There are some reliefs available for sole traders and partnerships, such as the sole trader’s tax free threshold of having a taxable income which is equal to or less than $18,200 (though this value may change every now and then).
There are also some small business discount concessions available, which can be applicable for capital gains, GST and excise duty concessions, and a number of Fringe Benefit Concessions.
Returns To Be Submitted
There is also the need to regularly submit income tax returns for sole traders. In case of partnerships and companies, both the individuals and also the companies should separately file income returns. There can be hefty penalties and fines for improper or incomplete submissions to the Australian Taxation Office (ATO).
Minimise Your Taxes
The Australian legal system can be fairly daunting to a foreigner or first-time tax payer in Australia, and that’s why you should consider getting an accountant to help with your taxes. At Femia Accountants, we specialise in helping foreigners minimise their taxes and maximise their deductions, so contact us today and see how we can help prepare your taxes accordingly.
Australian Tax Residency Rules
Tax residency can significantly impact whether you are paying taxes in Australia, and how much. For example, the majority of Australians who work overseas for two or more years are conferred the status of a Non-Resident, which means they do not have to pay taxes back in Australia. But what if you are a foreigner – how do you define whether or not you are eligible to pay taxes? In this article, we explore how Australia’s tax system work for both foreigners and locals.
So how do you actually determine your tax residency? There are several Residency Tests such as the Resides Test, Domicile Test, Superannuation Test and the 183-day rule. Ultimately, the decision rests with the Australian Taxation Office (ATO) based on the information you provide to them. But here are a few common scenarios to consider:
If you are an Australian returning from overseas and decide to live in Australia again, you are a tax-paying resident from the day you arrive back to the country.
If you are going overseas on a temporary basis and you are not setting up a permanent property overseas, you are a tax-paying resident.
If you are a foreign student enrolling at any educational institution and the course duration is lesser than 6 months, you are a tax-paying resident.
If you are visiting Australia and are scheduled to stay in the country over a span of 6 months and live at the same location of your job, you are a tax-paying resident.
If you are visiting Australia on a holiday trip with your family or visiting the country with a plan to stay in the country for less than 6 months, you are not a tax-paying resident.
If you are leaving the country permanently, you are not a tax-paying resident from the day you move out of the country.
What is a Dual Tax Agreement?
If you are a citizen of one country and earning in another country, yet both of these countries do not have any tax agreements, then you might end up paying taxes in both countries! With the ease of earning income from multiple sources whether locally or internationally, it’s imperative that you understand any tax agreements that you can benefit from in order to minimise your taxes.
Australia’s Dual Tax Agreements
Australia has made dual tax agreements with many countries that include the US, UK, Indonesia, Germany, Malaysia, Russia, Singapore, Vietnam, Hungry, and France.
For example, the dual tax agreement between Australia and the US states that the US will tax Australian residents who are earning an income from the US at the rate of five percent and that Australia will tax them based on normal tax brackets, but five percent less.
As a rule of thumb, there are different clauses on dual tax agreements depending on the country, your earning status, and your period of stay in Australia.
However, it is definitely much easier to get the help of an accountant to identify the best taxation advise for you and to ensure you minimise your taxes. Drop by for a chat with Femia Accountants to ensure you are not double taxed and only paying what is necessary.
Tax on Foreign Income For Australians
An Australian resident is taxed on worldwide income making it an obligation for them to declare any foreign income when filing their taxes. Foreign income includes pensions and annuities, employment income, investment income, income from business operations, and capital gains from overseas assets. Irrespective of the fact that the income may have been taxed in the source country, it’s potentially subject to double taxation in Australia as well. The Australian government has signed tax treaties with more than 40 countries in order to overcome this. This also includes all major trade and investment partners.
Double Tax Agreements
Double tax agreements are negotiated to decide which country or territory has the first or sole right to tax specific types of income. This only happens if both countries or territories tax their residents on worldwide income.
An Australian is entitled to claim deductions for some expenses that are directly related to their earning income. To claim these deduction, one must have spent the money herself and weren’t reimbursed already for it, and the deduction must be related to the individuals’ job. This means there must be a record to prove it – though there are some limited exceptions.
The above is in the case of work related deductions. But if the expense happens to be both for work and private purposes, then one can only claim a deduction for the work related portion.
Employment income is money received from working. Employment income must be included on the tax return. Incomes received from pensions as super income stream, annuities or government payments must be declared. For super income stream, one needs to declare the taxed element and the untaxed element. Most annuities have both the taxable and the tax free component. Some government payments such as disability-support pension, child disability allowance, carer adjustment payment and the veterans’ affairs disability pensions and allowances are all exempted from tax but should be declared on the tax return.
As you can see, there a lot of things to consider with regards to foreign income tax for an Australian. To ensure that your tax is suitably prepared, contact Femia Accountants today as we are experts in foreign income tax for fellow Australians.
Contact our office today on 9316 4500 or book a time to meet with us.