Yahoo Finance How to avoid being taxed twice on your overseas income
Here’s everything you need to know about the foreign income tax offset.
If you’re an Australian tax resident, you’re taxed on your entire worldwide income but there's a way to make sure you're not paying twice.
To comply with Australian tax law, you need to declare any foreign wages, foreign capital gains (perhaps on the sale of an overseas rental property or foreign shares), foreign bank interest and dividends, foreign pensions, and any other sources of income you receive - both in Australia and from overseas.
You might also be subject to tax in the foreign country that was the source of income, which would mean you could suffer from double taxation – taxed in the overseas country of origin and taxed here in Australia.
So, how can you avoid this and hang on to more of your hard-earned cash?
If eligible, you can claim a foreign income tax offset (FITO) on your Australian tax return, which will prevent you from being taxed twice.
Here’s how a FITO works and how it benefits you.
How a FITO works
The way a FITO works is that your foreign income and capital gains are taxed overseas and then a credit is available on the Australian tax return for the Australian-dollar value of that tax paid. To be able to claim a foreign income tax offset, you must:
Have paid an amount of foreign income tax in relation to foreign income
Included the income or capital gain you paid foreign income tax on in your tax return
The FITO can only be claimed after the amount of foreign tax is actually paid – not in relation to foreign tax that is accrued but not paid. If the foreign income tax is paid in a later Australian tax year, you need to go back and amend the original tax return containing the foreign income.
You have four years from the date the foreign tax was paid to submit an amendment. Note that all foreign income, deductions and tax payments must be converted to Australian dollars at the applicable rate.
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The FITO is a non-refundable tax offset, which then reduces your income tax payable (including Medicare levy and Medicare levy surcharge) but it cannot create a loss. It is applied after all other non-refundable tax and non-transferable offsets, meaning that if the FITO exceeds the amount of tax otherwise payable for the year, the excess is lost and cannot be transferred to another taxpayer or carried forward to a later income year.
So, how do these rules apply to some common types of foreign income?
Example 1: Receiving a foreign dividend
Normally, the foreign tax must be paid by the entity claiming the offset. However, what if the tax is actually paid by a different overseas entity, such as with dividends?
For example, say an Australian resident receives a dividend from an overseas company from which the company deducted a percentage in foreign tax before paying this to the Australian resident. Can a FITO offset be claimed for the withholding tax?
FITO rules say that to claim a foreign income tax offset, you must have actually paid an amount of foreign income tax in relation to foreign income. But, in this case, the taxpayer hasn’t actually paid the tax, the overseas company did. So, in this type of scenario, the FITO rules deem this tax to have been paid on behalf of the taxpayer. Therefore, a FITO can be claimed. The gross dividend is included in the Australian tax return and a FITO is claimed for the withholding tax.
ATO example: Emma has shares in a company based in the United States. She was entitled to be paid a dividend of $400. Before she was paid the dividend, the company deducted $60 in foreign tax, sending Emma the remaining $340. When she fills in her Australian tax return, Emma includes the full $400 and she may be able to claim a foreign income tax offset of $60.
Example 2: Capital gains tax on foreign investments
If you pay foreign tax on a foreign capital gain, the offset is available provided that the gain is “taken into account” in determining your assessable income.
For individuals, this can mean that a FITO is only available for 50 per cent of the foreign tax paid because you may be entitled to the 50 per cent discount if you held the asset for at least 12 months.
If you have a net capital loss in Australia for a year, the foreign tax on the capital gain can’t be claimed because it was not paid in respect of an amount included in assessable income.
Example 3: Foreign exchange gains/losses on foreign investments
Your tax return must be filed in Australian dollars. That means that the amount of the foreign currency gains or profits that you receive in respect of international income must be converted to Australian dollars. When you’re declaring income, two rates may be used depending on the circumstance.
If you receive the income into Australia it must be calculated at the exchange rate for the date you received the income.
If you keep the income in an international account, the exchange rate at the end of the financial year is used.
To work out capital gains and losses, you also need to calculate the Australian-dollar equivalent of the sales proceeds (converted at the date of sale) and take away the Australian-dollar equivalent of the acquisition cost (converted at the date of acquisition). It isn’t enough to simply convert the foreign currency gain into Australian dollars.
If you have any doubt at all about your status, we strongly advise you to consult a tax agent at H&R Block. Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to our free daily newsletter.
