What Is Foreign Income? Do I Declare It?

What Is Foreign Income? Do I Have to Declare It? How Do I Do That? It's in a Foreign Currency? The Tax Years Are Different?

Today, we’re diving into the world of foreign income. If you’ve earned money overseas, you might be wondering if you need to declare it on your Australian tax return. The answer is usually yes, so let's break it down in simple English.

What Is Foreign Income?

Foreign income includes any income you earn outside of Australia. This can come from various sources such as:

• Salaries and Wages: Working overseas for an employer.
• Business Income: Running a business or providing services abroad.
• Pensions and Annuities: Receiving payments from foreign pension schemes.
• Investment Income: Interest, dividends, and rental income from foreign assets.
• Capital Gains: Profits from selling overseas assets.

Do I Have to Declare Foreign Income?

Yes, as an Australian resident for tax purposes, you must declare your worldwide income, including foreign income, on your Australian tax return. This is known as your worldwide income.

How to Declare Foreign Income

1. Convert to Australian Dollars:

   • You must convert all foreign income, deductions, and tax offsets to Australian dollars. Use either the specific prevailing exchange rate at the time the income was received or the average exchange rate for the financial year.

2. Report in the Correct Sections:

   • Salary and Wages: Include in the "Salary and Wages" section.
   • Business Income: Report in the "Business and Professional Items" section.
   • Investment Income: Include in the relevant sections for interest, dividends, and rental income.
   • Capital Gains: Report in the "Capital Gains" section.

3. Foreign Tax Paid:

   • If you paid tax on your foreign income in another country, you might be entitled to a foreign income tax offset to avoid double taxation. Report the foreign tax paid and claim the offset in your tax return.

Handling Different Tax Years

Many countries have different tax years from Australia’s (which ends on June 30). Here’s how to handle it:

• Apportioning Income: You may need to apportion foreign income across multiple Australian tax years. Determine which Australian tax years the amounts should be reported in and apportion accordingly.

Traps to Avoid

1. Not Converting Currency:

   • Always convert your foreign income to Australian dollars. Failing to do so can lead to errors and potential penalties.
   • Example: Emma received €10,000 in rental income from a property in France but didn’t convert it to AUD. This resulted in an incorrect tax declaration.

2. Double Dipping:

   • Claiming tax deductions in both Australia and the foreign country.
   • Example: Alex claimed the same business expense in both his Australian and US tax returns. The ATO disallowed the double tax claim.

3. Incorrect Reporting:

   • Misreporting the type of income (e.g., reporting business income as salary).
   • Example: Mike reported his freelance income from Canada as salary and wages instead of business income, leading to a tax audit.

Non-Deductible Expenses

Not all expenses related to earning foreign income are tax deductible:

• Personal Expenses: Costs like personal travel or accommodation.
• Non-Business Related Costs: Expenses unrelated to your income-generating activities.
• Initial Capital Costs: Costs incurred to set up a business or acquire an income-producing asset.

Example of Non-Deductible Expenses

• Personal Expenses: Jane travelled to Italy for a holiday and tried to claim her travel expenses as a tax deduction. The ATO disallowed it.
• Non-Business Related Costs: Tom bought a laptop for personal use and tried to claim it as a business expense. The claim was denied.
• Initial Capital Costs: Sarah set up a new business overseas and tried to claim the initial setup costs. These were not allowed as immediate tax deductions.

Gotax Piece of Tax Advice

Stay Informed and Plan Ahead: Understanding your tax obligations for foreign income can save you from costly mistakes. Always keep detailed records, convert your income to Australian dollars, and consult a tax professional if you’re unsure. Proper planning and accurate reporting will ensure you maximise your tax benefits and avoid penalties.

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