Foreign Income and Tax Credits

Australian residents and worldwide income

Australian tax residents are taxed on worldwide income. All foreign-sourced income is assessable unless a specific exemption applies. Foreign salary, wages, business income, interest, dividends, rental income, and capital gains must be converted to AUD and included in the individual tax return under the relevant labels. Temporary residents have special rules that can exempt many categories of foreign income, but this guide covers full Australian tax residents. The ATO expects foreign income and foreign tax paid to be translated to AUD using appropriate exchange rates based on Reserve Bank of Australia (RBA) rates. For one-off amounts (discrete capital gain, lump-sum bonus), use the rate on the date of the transaction. For recurring income (salary, pension, regular interest or dividends), use a reasonable average rate over the period.

Foreign Income Tax Offset: core rules

Division 770 of the ITAA 1997 provides a non-refundable Foreign Income Tax Offset where foreign income tax has been paid on an amount that is also included in Australian assessable income. The foreign tax must have been actually paid (or be taken to have been paid). The offset is claimed in the income year the related income is included in assessable income. If foreign tax is paid in a different year, you typically amend the relevant return to claim the offset for that year.

Reporting FITO and evidence requirements

Foreign income is reported in the Foreign income and other relevant sections of the individual tax return. Supporting disclosure includes the income type, foreign tax paid, and country involved. FITO is claimed at the dedicated offset label. Evidence required includes the amount of foreign income, the foreign tax year, the nature and amount of foreign tax, and the date foreign tax was paid. If you learn later that foreign tax has been imposed on income already returned in Australia, lodge an amendment to the original year's return to claim the offset for that year. Keep foreign tax assessment notices, withholding certificates, and foreign tax return copies as supporting records.

Foreign rental income and CGT on overseas property

Foreign rental income is assessable in Australia on a net basis. Foreign rental expenses (interest, repairs, agent fees, insurance) can be deducted. Where foreign tax has been paid (for example, non-resident withholding on rent in the source country), FITO may be available if the rental income is also included in Australian assessable income. Capital gains on foreign real property are generally subject to Australian CGT for residents. The 50% CGT discount applies if the property has been held for more than 12 months. Foreign CGT on the same disposal can form part of the foreign tax eligible for FITO, subject to the usual limit rules. Keep records of both the purchase and sale in the foreign currency and in AUD at the relevant transaction dates.

Foreign employment income exemption (s 23AG)

Section 23AG of the ITAA 1936 provides an exemption for certain foreign employment income where the individual is engaged in continuous foreign service for 91 days or more. Since 1 July 2016, this exemption has been significantly narrowed. It now applies mainly to foreign service directly attributable to delivering Australian official development assistance, certain activities of qualifying charities and public disaster relief funds, and deployment by an Australian government as a member of a disciplined force. Routine private-sector foreign employment income does not qualify. For the vast majority of self-employed readers and private-sector employees, foreign employment income is fully taxable in Australia, with relief from double taxation through FITO if foreign tax has been paid. The s 23AG exemption is now rare and niche.

Controlled Foreign Company (CFC) rules

Australia's CFC regime under Part X of the ITAA 1936 applies where Australian residents have sufficient control over foreign companies in designated jurisdictions. Certain tainted income (mainly passive or related-party income) of the CFC can be attributed to Australian controllers even if not distributed as dividends. Foreign tax offsets are potentially available for tax paid by the CFC on attributed income. CFC rules are complex and interact with other anti-deferral measures including the transferor trust provisions and the foreign accumulation fund rules. They are most relevant to higher-end structuring involving foreign holding companies, and in practice require specialist advice rather than self-assessment. The ATO actively scrutinises offshore structures involving controlled entities.

Foreign trust income and ATO compliance focus

Australian residents who are beneficiaries of foreign trusts are generally assessable on trust distributions and, in some cases, attributed income under specific anti-avoidance provisions. Where foreign tax has been paid at the trust level or in the foreign jurisdiction on amounts flowing through to Australian beneficiaries, Division 770 may provide access to FITO, subject to the foreign tax having been paid on income that is assessable in Australia. Offshore trust structures are an ATO compliance focus. The ATO uses CRS and AEOI data feeds to identify undisclosed foreign trust interests. Specialist advice and careful record-keeping are essential, particularly around how much foreign tax has been paid and by whom in the trust chain.

Statute references

• ITAA 1997 Division 770 (Foreign Income Tax Offset)
• ITAA 1936 s 23AG (foreign employment income exemption, narrowed since 2016)
• ITAA 1936 Part X (Controlled Foreign Company rules)
• ATO foreign income guidance (reporting, FX conversion, evidence)
• Reserve Bank of Australia exchange rates (monthly and annual averages)
• Common Reporting Standard (CRS) and Automatic Exchange of Information (AEOI)

Frequently asked questions