Quick question: Do you earn any income from overseas?
Maybe you’ve got a side hustle with an international client or some investments in foreign markets.
Well, as an Australian resident, it turns out that you have to report all of that income to the Australian Tax Office (ATO).
It might sound a bit overwhelming, but don’t worry — We have got your back!
In this blog, we will walk you through exactly what you need to know about reporting foreign and worldwide income so you can feel confident when it’s time to file your taxes.
What is Foreign Income?
Foreign income refers to any money you earn from sources outside of Australia. This could be income from a variety of sources:
Foreign employment: If you work for an overseas company or have clients from abroad, that is considered foreign income.
Overseas investments: Dividends, interest, or rental income from property outside Australia also fall into this category.
Freelancing or side jobs: If you freelance or run a business for clients located in other countries, that income needs to be reported.
Government payments: Any benefits or pensions from a foreign government need to be declared as well.
So, if you have any income coming from these or similar sources, it is crucial to report it to the ATO. And remember, it does not matter where the income was earned. If you are an Australian resident, the ATO wants to know about it.
Do You Have to Report All Foreign Income?
Yes, you do.
As an Australian resident for tax purposes, you are required to report all income you earn, regardless of whether it is earned in Australia or overseas. The key thing to remember here is your tax residency status. If you are an Australian tax resident, you must declare your worldwide income, not just the money you earn locally.
Why Does the ATO Care?
You might be wondering why the ATO is so interested in foreign income. The simple answer is: fairness.
The ATO aims to make sure that everyone pays their fair share of tax based on their total income. Whether that income comes from Australia or abroad, it is still subject to the same tax laws.
Additionally, Australia has agreements with many countries to avoid double taxation. These agreements ensure that you’re not taxed twice on the same income.
So, if you have already paid tax in the country where the income was earned, you may be eligible for a tax offset or deduction in Australia. But to benefit from this, you must first declare the foreign income.
How to Report Foreign Income
Now, let’s talk about the process. Reporting foreign income can sound a bit tricky, but do not worry, it is actually pretty straightforward.
Here’s what you need to do:
Declare the income in your tax return
When you file your tax return, there is a specific section for foreign income. You will need to include all income you have earned from overseas, just like you would for Australian income.
Convert foreign income to Australian dollars
The ATO requires you to report your foreign income in Australian dollars. If your foreign income is in another currency, you must convert it using the exchange rate for the relevant year.
Claim foreign tax offsets
If you have already paid tax on this income in another country, you may be able to claim a foreign income tax offset. This can reduce the amount of tax you owe in Australia, preventing double taxation. The ATO has guidelines for how to calculate this offset.
Keep records
You will need to keep records of your foreign income, including documents like pay slips, bank statements, and proof of tax paid in the other country. The ATO may ask for these documents, so it’s a good idea to stay organised.
Common Mistakes to Avoid
When it comes to foreign income, it is easy to make mistakes. Here are a few common ones to watch out for:
Not reporting all foreign income: It might be tempting to skip over certain sources of foreign income, especially if you are earning small amounts or working with foreign clients who do not report their income to the ATO. But remember, if it is income, it needs to be declared.
Forgetting to convert to Australian dollars: As we mentioned earlier, you have to report your foreign income in AUD. It is easy to forget this, but it can lead to issues down the line.
Not claiming foreign tax offsets: If you have already paid tax on your foreign income in another country, do not miss out on claiming a foreign income tax offset. This can help reduce your Australian tax liability.
Inaccurate or missing records: Keeping proper records is essential. If you can’t provide evidence of your foreign income or taxes paid, you might find yourself in trouble.
Final Thoughts
We know that taxes can be a tricky topic, but by taking the time to understand how foreign income works and what the ATO expects, you’ll save yourself a lot of stress come tax season. You don’t have to go through this alone. Clear Tax is here to help and make the process as smooth as possible.
So, if you’re earning money from overseas, don’t put off reporting it. Stay on top of your tax obligations, and you’ll be set for success.
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