Earning an income from overseas? Understanding international tax agreements

We live, work and play in a global economy. Pandemics notwithstanding, people move around the world for work, study or even for a few years of adventure. In many of these circumstances, this may mean working in a foreign country and therefore, earning foreign income. 

Not to mention, the modern Australian population is made up from people of all different nationalities with some of them being able to claim pensions and other payments from their country of origin. 

And what are the rules for foreign residents working in Australia?

If you fall under any of these categories, understanding international tax agreements is essential.

What's considered foreign income?

If you’re an Australian resident for tax purposes and earning income from working overseas, you need to report this income to the Australian Taxation Office (ATO) on your annual income tax return. 

If you’re a foreign resident working in Australia, you’ll only be taxed on income from Australian sources. 

However, if you have any of the following loans from the Australian Government, Higher Education Loan Program (HELP), Trade Support Loan (TSL) or VET Student Loan (VSL), you might need to declare your worldwide income. It’s also worth noting that in this situation, worldwide income otherwise ignored by the ATO, may need to be included.

For more information, download a summary of overseas income you’ll need to declare.

Not sure if you’re an Australian resident or foreign resident for tax purposes? Check your tax residency here.

How to find out if you're an Australian resident for tax purposes

To find if you’re an Australian resident for tax purposes as:

• an individual – see the Work out your residency status for tax purposes
• a company or trust – see the Residency requirements for companies, corporate limited partnerships and trusts.

Australian Resident 

The ATO website says:

‘As an Australian resident for tax purposes, you must declare income you earn anywhere in the world on your Australian tax return. This is known as your worldwide income. This includes any foreign income you may receive from:

• pensions and annuities

• business activities

• employment and personal services

• assets and investments

• capital gains on overseas assets’

Australian residents (for tax purposes) with a tax file number (TFN) are usually taxed at a lower rate than foreign residents.

‘If you’re an Australian resident for tax purposes and you: 

You have a temporary resident visa

• most of your foreign income isn't taxed in Australia

• we tax your income from actual work you do overseas while you are a temporary Australian resident (see Exempt foreign employment income)

You receive foreign income

• income may be taxed in both Australia and the country from where you received it

• tax paid in another country on your foreign income may entitle you to an Australian foreign income tax offset

You receive income from a country that has a tax treaty with Australia

• you can ask the tax authorities in that country to reduce their withholding tax or to exempt you from paying tax in that country

• done by supplying a tax relief form or a certificate of residency or status.’

What about double taxing?

If you’re also taxed in the country where you worked or are working, you could find yourself being double taxed. To avoid this, Australia has a system of credits and exemptions, as well as signed tax treaties with more than 40 countries, including all major trade and investment partners.

Do tax treaties work both ways?

The ATO receives and exchanges financial account information with participating foreign tax authorities, ensuring Australian residents with financial accounts in other countries are complying with Australian tax law. Penalties and interest charges apply for non-disclosure of foreign income.

Employment and personal services income

The ATO tells us:

‘If you’ve worked overseas or provided services to an organisation located outside of Australia, you’ll need to declare all relevant income as if it were earned in Australia. This may include:

• salary and wages

• directors fees

• consultancy fees

• business income

• any other remuneration’

More specific information is available on the ATO website.

International tax agreements 

The ATO has international tax agreements for Australian residents and non-residents. These include:

• tax treaties
• other international tax arrangements, and:
• bilateral superannuation agreements.

On the ATO website you’ll find lots of information about specific tax agreements, including links to the tax treaties for the more than 40 countries who have current tax treaties with Australia. 

What's a tax treaty? 

The ATO defines a tax treaty as ‘formal bilateral agreements between two jurisdictions. 

A tax treaty is also referred to as a tax convention or double tax agreement (DTA). They prevent double taxation and fiscal evasion, and foster cooperation between Australia and other international tax authorities by enforcing their respective tax laws.’

Why have tax treaties?

‘Generally, Australia's tax treaties operate to:

• reduce or eliminate double taxation caused by overlapping tax jurisdictions

• provide a level of security about the tax rules that will apply to particular international

• prevent avoidance and evasion of taxes on various forms of income flows between the treaty partners’

How do tax treaties work? 

Tax treaties work as they relate to a person's residency status, how tax applies to income and business profits they earn or tax relief they receive in the other jurisdiction. 

Are there any exemptions? 

You’re exempt from paying tax on foreign income if you’re:

• a member of the Australian defence forces
• a member of the police force, or:
• engaged in overseas aid work.

For more information about your tax obligations when it comes to foreign income, the Kelly+Partners team are here to help you stay on the good side of the taxation office.