Assessable Exempt

Foreign pensions and annuities

Most foreign pensions and annuities X
Certain pensions relating to World War II X
Foreign employment income
Employment other than foreign service X
Continuous foreign service for 91 days or more, subject to conditions X
Overseas employment with the defence forces, police, international organisations and aid X
projects, subject to conditions
Foreign investment income
Passive income such as interest, portfolio dividends, royalties and rent X
Non-portfolio dividends paid to a company, subject to conditions X
Attributed income from foreign entities X
Dividends received by an Australian resident sourced from profits that have been previously X
attributed, subject to conditions
Foreign business income
Income from exports of goods and services that is defined as foreign income that does not X
meet the branch profits condition below
Foreign branch profits of an Australian company, subject to conditions X
Capital gains on overseas assets
Most capital gains X
Foreign branch gains of an Australian company, subject to conditions X
Certain capital gains made by Australian companies on the disposal of their shares in X
foreign companies with underlying active businesses, subject to conditions

Australian Tax Treatment – FIF’s ,FLP’s &

Property Rental/Sale
Capital gains on overseas assets
Australian residents are generally taxed on any capital gains made on an overseas asset and must report the gain on
their income tax return.
If the gain is taxable in Australia and you have paid foreign tax on it you may be entitled to a foreign tax credit.
For more information, refer to Taxation Ruling IT 2562, The personal investor’s guide to capital gains tax 2004–2005
(NAT 4152) and the Guide to capital gains tax 2004–2005 (NAT 4151).

Reporting foreign income – quarantining rules

Other than employment income, pensions and annuities, foreign income must be categorised into four classes for tax
purposes:
• interest income,
• modified passive income – passive income other than interest (that is, royalties, dividends and rent),
• offshore banking income, and
 • all other assessable income.
You can only deduct expenses you incurred in relation to a category of foreign income against foreign income of the
same category (quarantining). You need to separately work out your net income in each category by subtracting
deductible expenses together with any allowable foreign losses from previous years from any assessable income. For
more information read How to calculate your foreign income.
Note you can’t offset expenses or losses in relation to foreign income against any Australian source income unless
the expenses are debt deductions. These must not be attributable to any overseas permanent establishment you may
have. Foreign losses are quarantined but may be offset against foreign income of the same class in later income
years.
You can choose to use all or some of your Australian tax losses of earlier income years to reduce your net foreign
source income. Read Foreign source income – Australian tax losses of earlier income years.
Before you calculate your net income in each category, you must convert all foreign income, deductions and foreign
tax paid to Australian dollars. Read Converting foreign income to Australian dollars.

Foreign investment table

Status Action
Have you received income from overseas other than Categorise (see above) your foreign income for tax
a salary, pension or annuity? purposes.
Do you have interests in a foreign entity or dealings Income may be attributed to you even if it hasn’t been
with a related party? distributed and you may have special reporting
obligations.
Have you made a capital gain on the disposal of an You may need to declare it in an Australian tax return
overseas asset? and pay capital gains tax.

Attributed foreign income

If you have interests in a foreign entity as an Australian resident or are involved with a foreign trust, your share
of the entity’s income may be attributed to you for income tax purposes even if the income has not been
distributed.
Broadly, income may be attributed to you, and you need to declare it, if you have:
• an interest in a non-resident company or non-resident trust (known as a foreign investment fund – FIF)
or a foreign life assurance policy ( FLP),
• a direct or indirect interest in a foreign company controlled by Australians (known as a controlled
foreign company – CFC) or a foreign trust controlled by Australians (known as a controlled foreign trust
– CFT) or you effectively controlled the CFC or CFT, or
• at any time, directly or indirectly caused the transfer of property (including money) or services to a non-
resident trust.
To prevent double taxation, dividend income received by an Australian resident sourced from profits that have
been previously attributed under these rules is generally exempt from Australia tax.

Foreign investment fund (FIF) and foreign life

assurance policy (FLP) measures
The FIF measures apply to an Australian resident who holds an interest in certain income and gains accumulating in:
• foreign companies that are not controlled by Australians, or
• foreign trusts that are not already subject to attribution under the CFC, CFT and transferor trust rules.
The FIF measures apply to a taxpayers’ interest in a FIF or FLP if they:
• were a resident of Australia at any time in an income year, and
• had an interest in a FIF or FLP at the end of the income year.
The FIF measures also apply when working out the income of CFCs, CFTs or transferor trusts that hold an interest in
a FIF.
The FIF measures extend to certain FLPs that have an investment component, such as life bonds.
Taxpayers are assessed on any FIF/FLP income and capital gains earned by the FIF during the income year.
Where the taxpayer is not an Australian resident for the entire income year, they are assessed on the FIF/FLP income
that accrued while they were a resident.
For an explanation of FIF taxation exemptions see Foreign investment funds guide (NAT 2130).

Investing in overseas property

Income from investments in overseas property is generally foreign source income.

Rental income
If your property is located outside Australia, special rules apply to the deductibility of your rental property
expenses.
Rental income from an overseas property falls into the category of modified passive income. You can only
deduct expenses you incurred in relation to a category of foreign income against foreign income of the same
category. For example, deductible expenses on an overseas property can only be deducted against foreign
rental income or other foreign modified passive income such as royalties and dividends. If you make a net loss
in modified passive income in an income year you can only offset it against modified passive income (including
foreign rental income) derived in later years.
You don’t deduct the cost of debt (such as interest and borrowing costs) against modified passive income
(such as rent, royalties and dividends) for the purposes of this calculation unless they are related to the
income earned through a permanent establishment in an overseas country. If you have incurred debt
deductions in earning your foreign income under any of the four categories and the deductions are not
attributable to an overseas permanent establishment, you may claim them as ‘Other deductions’. For more
information read Foreign source income – other than employment, pensions and annuities.

Capital gains
Australian residents are generally taxed on any capital gains made on overseas property and must declare the
gain on their income tax return.
If the gain is taxable in Australia and you have paid foreign tax on it you may be entitled to a foreign tax credit.
Refer to Taxation Ruling IT 2562 [ATO legal database link], Personal investors guide to capital gains tax (NAT
4152) and Guide to capital gains tax (NAT 4151).
Prepared by :- Mark Moody, Farringdon Group

Source :- Australian Government; Australian Taxation Office (www.ato.gov.au)