Private ruling: Foreign sourced income
Date of advice: 12 October 2023
Published: 20 November 2023
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner allow you, XX, to return your foreign sourced income on a foreign income year basis in your Australian income tax return to work out your income tax liabilities under section 4-10 of the Income Tax Assessment Act 1997 for the financial years ended 30 June 20XX to 30 June 20XX? | A1: Yes

Relevant facts and circumstances: XX (you) are an Australian resident for income tax purposes. In conjunction with your Australian income tax reporting obligations, you are required to lodge an annual tax return in the foreign country. Your foreign income generally makes up a considerable proportion of your overall Australian taxable income. In the 20XX year approximately XX% of your overall assessable income related to foreign income reported in your annual foreign tax return. In the 20XX year the percentage was XX%. You estimate that well over XX% of your taxable income will consist of foreign sourced income in the year ended 30 June 20XX and future income years. You experience significant difficulty in dissecting your foreign income for the purposes of preparing and lodging your Australian tax return, partly because you derive several sources of foreign income, including salary and wages from your work as an XX, interest and royalties. These sources of income and investments are reported and taxed in the foreign country based on an income tax year ending 31 December. Your Australian tax advisors face significant difficulty in obtaining information in relation to your foreign income for the full year ended 30 June from your foreign country tax accountants in a timely manner, particularly income relating to the period between 1 January and 30 June. This is due to the information not being available in the required timeframes as a result of regulatory and reporting requirements imposed by foreign country authorities. Your foreign country tax accountants need time to collate and report information in relation to a 31 December year end. Due to lodgement extensions provided in foreign country, the foreign country tax returns may not be finalised for months following 31 December. Once they are finalised, they are provided to your Australian tax agents. Your Australian tax agents then need time to convert the information to Australian dollars, contemplate the relevant Australian tax implications and allocate the foreign income and foreign tax paid over the year. The need to disclose your foreign income on a 30 June year end basis considerably lengthens the time required to prepare your Australian tax returns as this involves:

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 4-10 | Income Tax Assessment Act 1997 section 15-20 | Income Tax Assessment Act 1997 section 770-10

Reasons for decision: Summary: The general rule is that for income tax purposes an individual taxpayer will be required to disclose in their Australian tax return the amount of foreign income derived during the Australian financial year. It has been recognised in the past that where an individual taxpayer's foreign source accounts have been prepared on a basis other than the year ended 30 June, difficulty can be experienced in dissecting the income for the purposes of returning on a strict Australian income year basis. The Commissioner of Taxation (the Commissioner) issued Taxation Ruling IT 2498 Income Tax: foreign tax credit system: currency translation of foreign income: trading stock and depreciable plant: basis of returning foreign income: capital gains/losses which addresses the issue of foreign income and expenses to be returned for an Australian year of income where foreign accounts and/or tax apply on a different basis. Paragraph 39 of IT 2498 states: ... individual taxpayers who are required to prepare foreign source income accounts on a basis other than a year ending 30 June and who can demonstrate difficulties in dissecting the income/expenses for the purposes of returning on a strict Australian income year basis in relation to a year of income, may be permitted to return the foreign source income in his or her Australian return for that year of income on the relevant foreign income year basis. ... You are in receipt of foreign source income. The income year for the foreign country is 1 January to 31 December. As a result of regulatory and reporting requirements imposed by the relevant foreign tax authorities you face significant difficulty in obtaining information in relation to the foreign income within a suitable timeframe to include in your Australian tax return by your lodgment due date. From the information provided the Commissioner accepts that your circumstances fall within those outlined in IT 2498. Accordingly, the Commissioner will allow you to return the foreign sourced income, and claim FITOs in respect of that income, on a foreign country income year basis in your Australian income tax returns for the 20XX to 20XX financial years. Australian source income, and other foreign income (such as dividends or interest) that is subject to a final withholding tax and can be readily returned on an Australian income year basis, would continue to be shown in the taxpayer's return on the basis of the Australian income year. If the difficulties which have warranted you being allowed to return foreign income on the foreign income year basis cease to exist, you will be required to return the foreign sourced income on the Australian year of income basis.

dissecting foreign income for the year ended 31 December from the prior year to determine the income that relates to the period 1 July to 31 December. This can involve an arbitrary allocation and may not always reflect the true pattern in which you derived your assessable income once adjusted for a 30 June year end | waiting on the foreign country tax accountants to provide information with regard to the foreign income for the period 1 January to 30 June | allocating foreign tax paid between financial years in order to calculate the correct Foreign Income Tax Offset (FITO). The current approach involves assuming that tax is paid evenly throughout the year, and then allocating tax paid over the Australian income tax year. This is further complicated by the legislative requirement in section 770-10 of the Income tax Assessment Act 1997 to only claim a FITO when tax has been paid in the foreign jurisdiction. Due to the overlapping periods, income derived in the period 1 January to 30 June, will not be reported in the foreign country return and the respective tax may not be paid until months after the tax return for the 30 June income tax year is due (if it is due on 31 March of the following year).