Private ruling: Foreign source income
Date of advice: 12 March 2021
Published: June 2021
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Question and answer | Will the Commissioner allow you to return foreign sourced income in the relevant foreign income year basis in your Australian income tax return? | Yes.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You are required to lodge tax returns in Country Y. Your tax returns are prepared by a tax agent. Your foreign income represents approximately X% of your overall income. You experience significant difficulty in dissecting your foreign income for the purposes of preparing and lodging your Australian tax returns. Your tax agent has difficulty in obtaining information relating to your Country Y income in a timely manner in order to prepare your Australian tax returns by your due date. This is due to the information not being available to finalise as a result of regulatory and reporting imposed by the Country Y authorities. Your Country Y tax accountants need time to collate and report information in relation to a DD MM year end. Due to lodgement extensions provided in the Country Y, the Country Y tax returns may not be finalised for many months following DD MM. Once they are finalised, they are then provided to your Australian tax agents. Your Australian tax agents then need time to convert that information to Australian dollars, contemplate the relevant Australian tax implications and apply an arbitrary allocation of the foreign income and foreign tax paid over the year. Your need to disclose your Country Y income on a 30 June year end basis considerably lengthens the time required to prepare your Australian tax return as it involves:  Dissecting Country Y income from the year ended DD MM to determine the income that relates to the period 1 July to DD MM. This involves 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 Country Y advisors to provide information with regard to the Country Y income for the period DD MM to 30 June. Following the receipt of this information (which is always after DD MM of the following income year), you need to review it and contemplate the Australian income tax implications in order to accurately reflect the information on your Australian tax return. As mentioned above, this involves arbitrary allocation and may not reflect the true pattern in which you derived your assessable income once adjusted for a 30 June year end. This process significantly affects your ability to lodge your Australian tax returns in a timely manner and has caused failure to lodge penalties being imposed on your income tax account in past years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision: Summary: The general rule is that for income tax purposes an individual taxpayer will be required to disclose in his or her Australian tax return the amount of foreign income derived during the Australian financial year. It has been recognised in the past that were 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 has 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. Specifically, 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 all of which have a tax year ending on DD MM. 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 lodgement due date. | Detailed Reasoning - Conclusion: From the information provided the Commissioner accepts that your circumstances fall within those as outlined in IT 2498 and will allow you to return the foreign sourced income on the relevant foreign income year basis in your Australian tax return. 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.