As Perth and Australia re-opens many families are looking offshore for growth and many families and the businesses they own are looking to relocate to Australia. And the international tax implications of when you change tax residency, generate income offshore (including through a foreign pension) or move capital into Australia from overseas has huge ramifications – both in terms of the Australian tax landscape but also the tax implications of the country where the money, or family, is leaving.
Of course many Australian businesses look to the export market development grant to help them when they are first trying to open their overseas markets.
What is foreign income
All types of income, for tax purposes, has a source. And the source of income from a taxation perspective effectively relates to where the income was generated. So if you have a rental property in Australia the source of that rental income is Australia. And if you are physically working in Australia the source of the income is in Australia.
The source of income is important from a taxation perspective. The ATO only has the power to tax you on income sourced from Australia – regardless of whether you are an Australian tax resident, an Australian temporary tax resident or a non-resident of Australia for tax purposes.
In some instances the source of income is important. If you are making digital software sales to the United States with a server based in New Zealand, from Australian intellectual property where the development team is based in Indonesia and the marketing agency is in India – understanding the source of the income can become complex.
Why is foreign income important for the ATO?
If you are an Australian tax resident your are taxed on both your Australian income and your worldwide income. However, if you are not an Australian tax resident (so you are a non-resident of Australia) you are only taxed on your Australian sourced income.
Australian tax residents usually enjoy lower tax rates than non-residents. And they enjoy a range of tax rebates and reduced capital gains tax.
So as an Australian tax resident you will be taxed on:
- Pensions and annuities
- Business operations
- Overseas employment income
- Investment income including dividends and interest
- Capital gains tax on overseas assets.
However if you are not an Australian tax resident the ATO can only approach you for income sourced in Australia.
If you are an Australian tax resident you and you are generating offshore income you might need to prove your tax residency. The ATO can issue you with a certificate of residency for this purpose where they have clear and strong information about your tax residency.
What about other tax regimes
Understandably other countries want to tax income that is sourced from that country. So if you are an Australian tax resident and you are taxed on your worldwide income, and your worldwide income suffers tax in that other country (say through a withholding tax) the ATO will only seek to tax you on the shortfall.
John in Perth earns $10,000 in interest income from the UK. His tax rate is 34%.
The UK taxes John $1,000 (10%) from his interest income before it comes to Australia.
Australia will only tax John $2,400 (24%) as he will be recognised for the UK tax paid.
Sadly not all taxes in other countries will be recognised for Australian foreign tax credit purposes. Taxes like death tax, stamp duty, underlying tax and other taxes will not give rise to a foreign tax credit. So great care needs to be applied when considering the tax paid before simply applying to enjoy the tax credit in Australia.
The overall impact of the foreign tax credit system is that if you enjoy income from an offshore tax haven the net effect will be that your foreign tax credit will be lower and your Australian tax liability will be higher.
Does double taxation happen?
Australia has double tax agreements with a range of countries. And the ultimate purpose of a double tax agreement is to prevent the double taxation of profits – however simply because the country you are dealing with does not mean the Double Tax Agreement will help you.
If you are looking at a double tax agreement it is important to note that some countries do not apply them equally and some types of entities are not covered by a double tax agreement. So getting a single piece of tax advice from an international tax advisory firm is important – Geneva Group International is such an example with Westcourt representing Western Australia for GGI.
Are foreign tax credits that helpful?
Any foreign tax credit is helpful. The tax you pay to the ATO will be typically be lower with a foreign tax credit than what would be the case if you don’t have a foreign tax credit.
However the tax structuring your accountant has created for you will make a difference. A foreign tax credit will not give rise to a franking credit in a company generating foreign income. So the foreign tax credit can be viewed as a temporary relief as the Australian tax burden is increased when you take unfranked dividends from the company.
In some instances we have assisted Australian families structure their tax affairs so that the foreign tax credit enjoyed becomes a permanent tax benefit. And this requires considerable thought to achieve the outcome.
Alternatively foreign tax credits only reduce your Australian tax burden. So if you have generated income tax is not taxable in Australia, and you have foreign tax paid on that income, you will not have a reduction in the Australian tax burden (because it is already nil).
How to get international tax correct
The taxation of offshore monies, the relocation of families or operating business offshore exposes to at least two different tax regimes – the ATO and somebody else (like the IRD or IRS). Getting a single piece of advice across the two tax regimes is critical to ensure that you have covered the tax law, and administrative tax impact, across both countries. At Westcourt we represent GGI Global in Western Australia so we have access to over 29,000 on the ground professional advisors across the world to help you understand the tax impact of moving money, wealth, family and business globally.
Given our deep international tax connections, single focus on helping families in business and proven tax expertise locally we are the natural choice for a family earning income overseas – so why not give us a call?