If you’re a foreign resident doing business in Australia, or an Australian resident working overseas, there can be some confusion about where you need to pay tax. Tax treaties determine whether or not you need to pay tax in Australia.
What are tax treaties?
Australia has tax treaties with more than 40 countries. These formal agreements – also known as tax conventions or double tax agreements (DTA) – are designed to prevent Australian residents from double taxation. For example, if you are an Australian resident doing business in the UK, a tax treaty ensures that your foreign income is not taxed in the UK and then again in Australia.
Tax treaties also formalise and enforce tax laws between countries. They are designed to stop tax avoidance on income generated overseas and to set out rules that are used to resolve disputes around the residential status of a taxpayer and the source of their income.
How do tax treaties work in Australia?
Where you pay tax generally depends on your residency status. That is, if you are an Australian resident you will usually be required to pay tax in Australia, even if your income is generated overseas. However, depending on the country in question, some tax treaties give the source country the right to tax certain types of income.
In these cases, the relevant tax treaty will prevent you from having to pay tax again in Australia on the same income. And, if you do pay tax on your foreign income in the source country, tax treaties ensure you can claim a foreign tax credit in Australia.
Do you need to pay tax on overseas transactions?
Typically, you only need to pay tax on foreign income in Australia if you are an Australian resident for tax purposes. You’re considered an Australian resident for tax purposes when you are either living in Australia and earning foreign income or living overseas temporarily and earning foreign income.
If you are considered an Australian resident for tax purposes, you must complete a tax return in Australia that declares all your employment and investment income – even if you’re still living overseas at the time. In cases where you have already paid tax on the income in the country you earned it, the relevant tax treaty will ensure you’re issued with a foreign tax credit in Australia.
Tax treaties are different for each country. Here is a full list of the tax treaties Australia has in place with other countries. Working out the rules for each country can be challenging, but most accredited accountants in Australia can walk you through the details. Looking for more tax advice? Check out these resources.