Tax payment on overseas income have been highlighted in recent cases as to why people are paying more tax than they thought they would be when income was made outside Australia.
As an Australian resident earning an income in another country which could include money from overseas investments, the sale of overseas property or dividends from foreign shares / trusts; you will need to declare this income on your Australian Tax Return.
Claiming Foreign Income Tax Offset
Often this foreign income will be taxed at the appropriate rate in the country of origin. You may be able to use the tax that you have paid to claim a foreign income tax offset that can then be used to reduce your Australian Tax bill.
Problems arise when there is a difference in rates of tax or how the tax is applied to the gain; this can mean that you may not have paid enough tax on the gain to claim the offset as ruled by the ATO.
Here is a recent example of where a taxpayer had to pay more tax than expected.
“The taxpayer in this case, was a resident of Australia but was taxed in the US on gains they made on interests in US real estate. Most of the gains they made were taxed at a concessional rate of 15% (rather than the normal rate of 35%) because the interests had been held for more than one year. Some of the gains were ultimately taxed at 35% in the US.
The capital gains were also taxed in Australia and qualified for the general CGT discount of 50%.
As the taxpayer was a resident of Australia and had paid tax on the US gains, the taxpayer claimed a foreign income tax offset for all of the US tax they paid. However, the ATO amended the tax assessment and only allowed a tax offset for slightly less than 50% of the tax they paid in the US.
The problem for the taxpayer was that while the US and Australia both have tax concessions for longer term capital gains, they operate quite differently. The US applies a lower rate to the whole gain while Australia applies a normal tax rate to half of the gain. Unfortunately for the taxpayer, the Federal Court held that the Commissioner’s approach was correct. If foreign tax has been paid on an amount that is not included in your assessable income, then you cannot claim a foreign tax offset on it. In this case, the portion of the capital gain that was exempt from Australian tax because of the CGT discount was not included in assessable income.”
Different tax concessions
Although the United States and Australia both allow for tax concessions on longer term capital gains, their systems operate quite differently. When it comes to capital gains the US considers the whole gain and applies the lower rate to all of it however in Australia half the gain will be taxed at your normal rate and the other half will attract the reduced rate of tax. Therefore, capital gains exemption will only be applied to a portion of the foreign tax that was paid and can be used to reduce your Australian tax liability.
Other countries have different rules as well if the foreign tax has been paid on an amount of income earnt overseas you may not be able to claim the full amount as a foreign tax offset.
When it comes to foreign assets it is not always as clear cut as it may seem when it comes to offsetting taxes that have been paid overseas. Please consult an accountant to see what is available for your exact situation.
Call the team at HBG Tax & Accounting to make an appointment on 08 9594 1963 to discuss all your tax needs.
This article was written based on information supplied from Knowledge Shop Newsletter February 2019.
The material and contents provided in this article is of informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.