A certain limit of credit is available for any foreign taxes that have been paid. This allowance helps offset the adverse effects of double taxation (taxes paid to a foreign country as well as to Australia) on the same amount. The credit allows Australian residents to claim part of the foreign tax paid towards their Australian tax liability on the foreign-sourced gross income. The foreign tax allowance is reported as non-refundable and is subject to the designated limit.
According to Australia’s general tax liability guidelines, there are some deductible expenditures, exemptions, and tax allowances that can be claimed on the foreign income. These guidelines regarding double taxation may vary based on Australia’s agreements with other countries. Australia has double taxation agreements (DTAs) with over forty other countries. The DTAs are set up to help eliminate conflict between two countries that may require taxation on profits. These agreements also give some double taxation relief to the taxpayer by outlining which country has taxing rights to certain types of income.
A DTA guarantees that taxation rights on certain types of income are awarded to either both of the countries or to just one individual country. Typically, the taxpayer’s country of residence is required to provide relief from the double taxation. The taxpayer’s home country usually does this by setting up a credit or exemption (similar to the foreign income tax deduction described earlier).
Employment Income
Australian residents are generally considered liable for taxes on foreign employment income. Depending on whether or not the foreign source country has a DTA set up with Australia, the foreign country may also have taxation rights on the income.
There are basically two main circumstances that may exempt foreign-sourced income from Australian tax laws. Both of these provisions stipulate that the foreign employment must have lasted at least ninety-one consecutive days or more. A few other conditions must also be met, but those are mainly related to employment performed while delivering foreign aid, while under foreign deployment orders from an organized forced, etc.
Fees for Independent Services
Miscellaneous fees gained by an Australian resident for independent services (i.e., contractor fees) are generally considered taxable. The only exemption would be if a relevant DTA exists between Australia and the source country that assigns exclusive taxing rights over to the source country.
Quite a few of Australia’s DTAs (like the Australia-U.S. treaty) include an individual personal services addendum. The DTA that Australia has with New Zealand does not include one. However, it does include independent services in their already broad definition of “business” – meaning that this type of income is taxable in accordance with their business revenues article.
Capital Gains
Australia requires foreign capital gains to be reported as income and therefore subject to income tax regulations. Any standing DTA obviously applies in conjunction with CGT guidelines as well. However, because some DTAs were negotiated before CGT measures were implemented on September 20, 1985, some of those treaties may be rather vague or not even mention capital gain taxing rights at all.
Foreign Pensions
The majority of DTAs state that pensions and other purchased annuities are taxable in the taxpayer’s country of residence. There are a few countries, though, that have separate laws for government and non-government issued pensions and annuities. Additionally, there are a few rulings given by the ATO that further detail tax liability for specific types of pensions received from certain countries.
Taxation on Dividends, Interest, and Royalties
Usually dividends, interest earned, and royalties procured from foreign sources are subject to Australian income tax. However, depending on the DTA set up between Australia and the source country, the taxpayer may be required to withhold foreign taxes from the income as well. If this is applicable, the amount of gross income (before any withholding tax) is considered taxable income by Australia.
Attributed Income
In regard to income that is “realised” or actually derived, an Australian resident that has foreign interests in a foreign company or trust may also be responsible for a percentage of the foreign company’s income that has not yet been distributed. In this instance, the Australian taxpayer is liable for this attributed percentage of the company’s income.
