Australian tax residents with overseas income — whether from foreign employment, investments, or a business interest abroad — sometimes worry about paying tax twice on the same income. This means once overseas, and again in Australia. However, the foreign income tax offset (FITO) exists specifically to prevent this, provided it’s correctly claimed.
As discussed in our guide to Australian tax residency, the ATO generally taxes Australian tax residents on their worldwide income. This means you need to declare foreign income in your Australian tax return, even if you already paid tax on it overseas. Consequently, without a mechanism to account for foreign tax you’ve already paid, the same income could effectively face tax twice — once from the foreign country and again from Australia.
FITO allows you to claim a credit for foreign tax you’ve genuinely paid, on income Australia also taxes. This reduces your Australian tax liability on that same income. Therefore, rather than paying full Australian tax on top of foreign tax you’ve already paid, the offset kicks in. It ensures you don’t pay more than the higher of the two rates overall.
Foreign employment income. Salary or wages you earn overseas that the foreign country has already taxed.
Foreign investment income. Dividends, interest, or rental income from overseas investments where you paid, or had withheld, foreign tax.
Foreign capital gains. Gains from selling overseas assets, where foreign tax applied to the transaction.
Foreign business income. Income from a business you operate overseas, where you’ve genuinely paid foreign tax on that income.
Evidence of foreign tax paid. Documentation showing the amount and type of foreign tax you paid is essential to support a FITO claim.
Accurate conversion to Australian dollars. You need to convert foreign income and foreign tax paid to Australian dollars, using appropriate exchange rates for the relevant period.
Correct income classification. You need to correctly categorise and declare the foreign income in your Australian return before you can apply the offset against it.
The foreign income tax offset generally can’t exceed a certain cap in specific circumstances. This means very large amounts of foreign tax you’ve paid may not be fully creditable in every situation. Consequently, this is worth reviewing carefully for people with significant foreign income, since the interaction between Australian and foreign tax systems can become genuinely complex.
Not declaring foreign income at all. Some people mistakenly believe that if they already paid tax overseas, they don’t need to also declare it in Australia. This isn’t correct for Australian tax residents.
Not keeping proper foreign tax records. Without documentation of foreign tax paid, you can’t properly claim the offset, even if you genuinely paid the tax.
Incorrect currency conversion. Using inconsistent or incorrect exchange rates can lead to inaccurate reporting of both the income and the offset claimed.
Foreign income and the interaction between different countries’ tax systems can be genuinely complex. This especially applies where tax treaties between Australia and specific countries affect how the ATO treats income. Therefore, this is an area where professional advice tends to add real, tangible value rather than being merely helpful.
EBATS helps Australian residents with overseas income declare it correctly and claim the foreign income tax offset accurately, avoiding double taxation.
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