ap_for01

Foreign Income

Some history - the foreign income, which used to be exempt, now just gets you a tax credit

On what basis does the Commissioner tax the income of a resident?

On what basis does the Commissioner tax the income of a non-resident?

Until 1/7/87, there was a general rule, which said if income from a source outside Australia was taxed by another country, it was exempt from Australian tax.

There were exceptions to this rule, especially in the various double tax agreements Australia had entered into with other countries, but by and large if another country taxed income from a source outside Australia, the income was exempt.

There were problems with this approach.

Any tax avoidance expert worth his hefty commission could arrange to alter the source of income (and even the residence of the recipient) to a tax haven with a minimal tax rate. So the taxpayer could 'buy' exemption from Australian tax buy paying a small amount of tax to a foreign country, usually situated in some South Seas paradise.

The obvious solution was to subject the income to Australian tax but to allow a credit for tax paid to another country.

That way, if the tax was being paid in a tax haven with a low tax rate, the tax credit would be worth very little to the Australian resident taxpayer.

The credit is limited to the tax payable, on the income, in Australia.

So if the tax paid to a foreign government in respect of foreign income is less than the tax levied by the Australian government, the taxpayer will have to make up the difference.

However if the tax paid to a foreign government is more than what is required to be paid under Australian tax rates, no refund is given.

There is still an exemption for employment income derived and taxed in another country, but this is not as generous as it seems

The topic on attributable income will give you some more history on the never ending quest to include income from sources outside Australia in assessable income of the recipient

On what basis does the Commissioner tax the income of a resident?

Division 6 is a catch all provision for receipts that answer the description of income ...

As you may recall, Division 6 talks about 2 kinds of income:

Ordinary income (which is assessable income because people think of it as income)

Statutory income (which is assessable income because the Income Tax Assessment Act says it is)

Section 6-5 (2) includes in the assessable income of a resident taxpayer

ordinary income you derived

directly or indirectly from all sources, whether in or out of Australia,

during the income year.

Section 6-10 (4) includes in the assessable income of a resident taxpayer

your statutory income

from all sources, whether in or out of Australia,

On what basis does the Commissioner tax the income of a non-resident?

Section 6-5 (3) includes in the assessable income of a non-resident taxpayer

ordinary income you derived

directly or indirectly from all sources, whether in or out of Australia,

during the income year.

As well as

other ordinary income that a provision includes in your assessable income

for the income year

on some basis other than having an Australian source.

Section 6-10 (5) includes in the assessable income of a non-resident taxpayer

your statutory income

from all sources, whether in or out of Australia,

As well as

other statutory income that a provision includes in your assessable income

for the income year

on some basis other than having an Australian source.

Let's just isolate the key factors in section 6. We will look at them in the following topics.

residence

source of income

Section 6 introduces several concepts, which we will consider separately but remember, it is really saying that assessable income includes....

Anything that answers the description of ordinary and statutory income is included in assessable income If it is income - it is included by section 6

Section 6 includes ordinary and statutory income from all sources (in or out of Australia) in the assessable income of a resident

On the other hand, a non-resident only has ordinary and statutory income from sources in Australia included in assessable income

So the rule in section 6 is -

Resident is taxed on income from all sources

Non-resident is taxed on income only from sources in Australia