Hey guys, Been investigating this whole worldwide income/foreign income tax offset thing. Currently my understanding is: If I as an Australian citizen and tax resident, earn any foreign income I must declare it This income then must be converted into AUD and reported under the foreign income tax offset The offset is in simple terms: All your worldwide income and deductions combined to create a total Australian tax bill Minus only your Australian income and deductions to create a local tax bill The difference between the two tax bill amounts is the offset you can claim (tax you don't have to pay) I do though have a couple of questions about the offset: So basically it doesn't actually take into account how much tax I have paid on the foreign income in said foreign country. The ATO examples all show where someone has paid more foreign income tax than the actual offset they are entitled. But I can think of examples where this wouldn't be the case. Am I right here that your offset can actually be far more than the foreign income tax you paid? How do foreign depreciation deductions work here? I could see a scenario where my paper or indeed some years non-paper foreign deductions outweigh my foreign income-does this allow me to reduce my Australian tax bill? Negative gearing in a sense? My understanding is also for properties in particular, I can choose to use average exchange rates, or specific exchange rates in each tax return I do as and how I see fit. As in I can switch backwards and forwards on each method I use each year? CGT is the main area where I could see one being caught out by the offset limits-as in there being quite a major tax difference. I take it the CGT discount still applies though? Do I have to repatriate the foreign income to AUS whenever I do my tax return or can I leave it wherever I want? I could see foreign exchange benefits in not repatriating. But likewise on this topic, are the ATO exchange rates supportive of the fact in real life one pays commission through lower exchange rates? Thank you very much for your assistance.
@Paul@PFI would be worth a call and take advantage of the initial consult. he knows about this so worth a call.
Common mistakes 1. Assuming tax residency. 2. Assuming 100% of foreign tax credits are creditable 3. Assuming that the exact same AUD value of the foreign tax actually paid is what is credited 4. Ignoring withholding tax v income tax 5. Not all taxes are creditable 6. Foreign tax on discounted capital gains may be only 50% creditable 7. Confusing repatriation of money with tax events. Deferring realisation of funds to AUD may result in a further (adverse) CGT issue 8. Failing to consider taxing laws in two nations. eg UK buy to rent may deny certain deductions which can be used in AU as third element costs. Depreciation is a good example. One nation may prescribe different rules to those required in Australia. 9. Different tax periods. This can be VERY confusing to most. However in some cases you may not be bound to use the actual foreign tax period and adjust to 30 June. And in that same return you may be obliged to for other income. The ATO allow some concessions for practical reason (tends to impact a AU tax resident with foreign source income from working etc) eg Fred works in PNG for an Australian firm. He is paid his income in PNG and tax is withheld. PNG has a calendar tax year. Australia has a 30 June year. Does he report using 2 x 6mth periods, report the December 2018 income in 2019 or run loads of complex calculations based on each payment ??? (Tip - All may be correct !! but once a method is used it cant change). 10. Some countries have VERY complex taxing regimes. eg Switzerland. They may withhold 40% at source. Australia will credit UP TO 20% not 40% ...What happens to the balance ?? A special paperwork regime exists to access that refund and results in TWO tax events.
