Have you retired to Australia with a pension from overseas, worked overseas for part of the year, or received income from investments held in another country? If so, it’s worth checking how that income needs to be reported in your Australian tax return.
As a starting point, if you’re an Australian resident for tax purposes, you generally need to declare income you receive from anywhere in the world. This is often referred to as declaring your worldwide income.
Foreign pensions and annuities
Most foreign pensions and annuities are taxable in Australia, even if tax has already been withheld overseas. However, the tax treatment can vary depending on the type of pension and whether Australia has a tax treaty with the other country. In some cases, you may be entitled to reduce the taxable amount.
For example, some foreign pensions have an undeducted purchase price (UPP). Broadly, this reflects personal contributions you’ve made towards the pension or annuity, with part of the pension treated as a return of those contributions.
There are specific rules for some overseas pensions. For example, if you receive a UK State Pension, you may be entitled to a UPP deduction. For a category A pension or category B widow’s pension, the ATO says the deduction can be calculated as 8% of the UK State Pension amount, converted to Australian dollars.
You may also be able to claim a foreign income tax offset if foreign tax has been paid on income that’s also taxable in Australia. This helps reduce the risk of being taxed twice on the same income.
Foreign income, deductions and foreign tax paid must generally be converted into Australian dollars.
Foreign employment income
If you’ve worked overseas, your employment income will often still need to be reported in Australia. Foreign income can also include payments from overseas platforms, such as income received by content creators or freelancers, although the way it’s reported depends on what the payment is for.
Some foreign employment income may be exempt from Australian tax, but only in limited circumstances. These rules are specific and can depend on the type of work, the length of overseas service, the employer and the country involved.
Why this is worth checking
Foreign income mistakes can be costly. If a tax return contains a false or misleading statement that results in a tax shortfall, penalties may apply. The base penalty can be 25%, 50% or 75% of the shortfall amount, depending on whether the issue involved a failure to take reasonable care, recklessness or intentional disregard of the law. Interest charges may also apply.
If you realise something’s been left out or reported incorrectly, it’s usually better to deal with it early. Voluntary disclosure may reduce any penalty.
Where to from here?
Foreign income can involve residency, tax treaties, offsets, exemptions, pension rules and currency conversion. If you receive money from overseas, we can help you get your tax return right by working out what needs to be declared and how the rules apply to your circumstances.