Australian Taxation of Foreign Income

When you become a resident of Australia, income earned overseas such as rental income from foreign properties and dividends paid by foreign companies will be taxable in Australia

Because income earned overseas may also be taxed by the country in which it was earned the Australian investor will often receive a return net of foreign tax. However, the Australian tax rules require you to include in your tax return the full entitlement to income (ie. 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. The credit is limited to the lesser of the Australian tax payable on the foreign income or the foreign tax deducted overseas.

You may also have expenses associated with your foreign investment income. These can be claimed as tax deductions against your foreign income, but there is a limit to how much of these expenses you can claim in any year. The deduction in any one year is limited to the amount of the foreign income that you receive. If your expenses exceed your foreign income, you cannot claim them in that particular year. You need to carry them forward to claim against foreign income in future years. However, interest expense incurred on a loan that generates foreign income will be deductible.

On a practical note, one slight difficulty that arises is the requirement that you include foreign income in your tax return expressed in Australian dollars. The exchange rate that you use depends upon what happens to the income. If the income is remitted back to Australia, you use the tax rate at the date of receipt. If the income is held overseas, for example in a foreign bank account, the exchange rate used is the rate at the end of the (tax) year.

From July 1st, 2003 new rules were introduced relating to foreign currency accounts. These rules require you to take into account foreign exchange rate gains and losses. The rules are very complex and advice should be sought from a tax advisor.

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