Taxation of foreign (UK, Jersey, Channel Islands etc) income

[Guest Liam]

When you become a resident of Australia, income such as rental income from foreign properties, dividends paid by foreign companies and distribution entitlements from foreign mutual funds / pension planswill be taxable in Australia.

 

Australian tax rules generally require you to include that foreign income in your tax return expressed in Australian dollars. The exchange rate depends upon what happens to the income. If the income is paid back to Australia, you use the tax rate at the date of receipt. If the income is held overseas eg. in a foreign bank account, the exchange rate is the rate at the end of the year.

 

Another issue to watch out for is that foreign countries (Uk included) may impose some tax on the income that you have earned from an investment in their country. This means that you will not receive the full amount of your investment income(you can submit a form to your bank to stop this). The Australian tax rules require you to include in you tax return the full entitlement to income before any foreign tax has been deducted. The foreign tax paid can be used as a credit against Australian tax payable on that foreign income (ie to prevent double taxation occurring).

 

You may have expenses associated with your foreign investment income. These can be claimed as tax deductions against your foreign income. There is a limit to how much of these expenses you can claim in any year. The deduction in any one year is limited to the amount of the foreign income that you receive. If your expenses exceed your foreign income, you can not claim them in that particular year. You need to carry them forward to claim against foreign income in future years.

 

Foreign investment fund rules

There is one particular tax issue which causes concern for many immigrants coming to Australia. This is the application of the foreign investment fund (FIF) rules. These rules were introduced by the Government as a means to stop people deferring the payment of Australian tax on investments in foreign/UK companies, foreign/UK trusts (including mutual funds, pensions) and investment policies issued by UK/foreign life companies.

 

The rules are stringent. They may require you to bring to account the increase in the market value of your UK held assets from year to year. You will be taxable on the increase in the value of the assets which means you could be paying Australian tax on unrealised foreign capital gains. YES YOU PAY TAX EVENN IF YOU HAVE NOPT CASHED IN THE INVESTMENT!

 

Example: Managed Fund grows by GBP1,000 in the last year after fees and charges. You are earning $40,000 in OZ. You need to add the GBP1,000 at the applicable exchange rate so $2130 to your taxable income (puts you in the 31.5% Marginal tax bracket). So you pay an additonal $670.95 in tax which has to come from your earnings as you have not cashed in your UK investment!

 

A number of exceptions do apply for shares held in listed foreign companies. However, not every listed foreign company is eligible for exemption. It is always wise to check with your Australian advisors as to whether investments you hold will be subject to the FIF rules.

 

Please note that the FIF rules do not apply to foreign real estate investments or foreign bank accounts (you must report the income annually on these).

 

Hope this is helpful

 

Always seek personal advice on your situation.

 

Liam