Tax warning on overseas income
Do you earn income overseas? A recent case highlights why you might pay more tax than you thought on foreign income.
Australian residents that earn income from overseas – be it from investments, sales of property and other assets, distributions from foreign trusts etc – generally need to declare these on their tax returns. In some cases, if you've paid tax in a foreign country on that income, you may be able to claim a foreign tax offset to reduce your liability.
However, while this might sound simple enough, a recent tax case highlights how problems can occur and how you might end up paying a lot more tax than you expected.
In this case, the taxpayer was a resident of Australia but taxed in the United States on gains that had been made on interests in US real estate. Most of the gains were taxed at a concessional rate of 15% (rather than the usual 35%) because the interests had been held for more than one year. Some of the gains were ultimately taxed at 35% in the US.
In Australia, the gains were also taxable 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, they claimed a foreign income offset for all of the US tax they had paid, however the ATO amended the tax assessment and only allowed for an offset of slightly less than 50% of the tax paid in the US.
The problem for the taxpayer is that despite both countries having tax concessions for longer-term capital gains, they operate differently. The US applies a lower tax rate to the whole gain, while Australia applies a normal tax rate to half the gain.
Unfortunately for the taxpayer, the Federal Court held that the Tax Commissioner's approach was correct. If the foreign tax that had been paid is not included in the Australian tax resident's assessible income, then a foreign tax offset cannot be claimed. The portion of the capital gain that was exempt from Australian tax because of the CGT discount wasn't included in the assessible income.
It is not uncommon for people who have made capital gains on foreign assets to assume that they get all of the tax back that they paid overseas. Unfortunately, that's not necessarily the case and often only a partial credit is available, if at all.
We highly recommend talking to an accountant that understands cross-border tax if you have any foreign income assets to ensure you're not hit with unexpected, high penalties or tax.
Contact us on 02 9957 4033 to speak to one of our international tax team.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.