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  • Foreign employment income – pay as you go

    Varying the amount of tax your employer withholds

    You can ask us for a variation to your Australian pay as you go (PAYG) withholding amounts. The main reason you would apply for a variation is to ensure the amounts withheld best meet your end of year tax liability.

    If we approve your variation we send a withholding variation notice to your employer. This allows them to reduce the amount they withhold from payments to you. We cannot provide a withholding variation notice in relation to any foreign tax withheld on the same payment in the other country.

    There is also a class variation your employer can use to reduce the amount of Australian tax they withhold on payments they make to you and their other employees working overseas. The reduction is based on the amount of foreign tax your employer has withheld and paid to a foreign government. Speak to your employer about this class variation.

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    How your income is shown on a payment summary

    From the 2009–10 income year, there is a separate PAYG payment summary for employees who have had amounts withheld from their foreign employment income.

    The PAYG payment summary – foreign employment will advise you of your gross foreign employment income and the total amount withheld for Australian PAYG withholding purposes. It may also show, separately, the total amount of foreign tax that your employer has withheld and paid to a foreign government.

    If you earn both foreign employment income and Australian employment income, and your employer is registered for the Australian PAYG withholding system, you will receive two payment summaries. In addition to the PAYG payment summary - foreign employment income, your regular PAYG payment summary – individuals non-business will advise you of your gross Australian employment income and the total amount withheld for Australian PAYG withholding purposes.

    You need to include all of your income in your tax return. This includes foreign employment income that is not reported on your payment summary.

    Foreign employment income is not PAYG instalment income

    Foreign employment income subject to PAYG withholding in Australia and shown on a payment summary does not form part of your PAYG instalment income.

    Foreign employment income not shown on a payment summary may form part of your PAYG instalment income. The value of non-cash benefits that you receive from your employer may also form part of your PAYG instalment income.

    Exempt foreign employment income will not form part of your PAYG instalment income.

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    If your foreign employer isn't taking tax out

    Australia's PAYG withholding system does not apply to foreign employers that do not have 'a sufficient connection with Australia.' Even if your foreign employer isn't taking PAYG withholding amounts out of your pay, you will need to include your foreign employment income in your annual tax return as assessable income (at the foreign employment income label).

    If your foreign employer is not subject to Australia's PAYG withholding system and therefore does not withhold Australian tax on your foreign employment income, it will be subject to the PAYG instalment system. We will advise you how much to pay in instalments in the following income tax year. The PAYG instalment system is a system for paying instalments towards your expected income tax liability.

    If your foreign employer provides you with a non-cash benefit and they are not subject to Australia's PAYG withholding system, you will need to include the value of the non-cash benefit in your assessable income.

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    If your foreign employer gives you a non-cash benefit

    If your foreign employer is not subject to Australia's PAYG withholding regime, they will not be subject to our fringe benefits tax regime either. If they give you a non-cash benefit in respect of your employment, you need to include the value of that benefit in your assessable income.

    Whether or not a non-cash benefit is convertible to cash determines what type of income we take it to be (ordinary or statutory). The value of convertible non-cash benefits (ordinary income) is generally subject to the PAYG instalment system. The value of non-convertible benefits (statutory income) is not.

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    Foreign employment income – tax offset

    Paying tax twice on foreign income

    If you pay tax on your foreign employment income in the other country and that income is not exempt from tax in Australia, you could pay tax twice on the same income. To prevent this, you may be entitled to claim a foreign income tax offset (FITO) for the foreign income tax you paid.

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    Claiming a FITO for foreign tax paid

    You may be able to claim a FITO on foreign tax you pay if you have both:

    • paid income tax in another country
    • included the same income (or gain) you paid the foreign tax on in your assessable income for Australian tax purposes.

    The FITO rules apply to income years starting on or after 1 July 2008. The FITO is non-refundable and you cannot carry forward any excess.

    Claiming a foreign income tax offset

    You claim the FITO in your Australian tax return:

    • in your assessable income, include the income or gain on which you paid the foreign income tax
    • claim the FITO at item 20 – Foreign source income and foreign assets and property.

    You need to convert your foreign income, foreign deductions and foreign tax paid to Australian dollars.

    If you are claiming a FITO of $1,000 or less, you only need to record the amount of foreign income tax you paid. If your claim is for more than $1,000, you need to work out your FITO limit first.

    Keep sufficient written evidence to support your claim for the FITO.

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    When you are considered to have paid foreign tax

    If you have paid an amount of tax to a foreign government that is correctly imposed under the law of the country (and in accordance with any tax treaty the country has with Australia), we consider you to have paid foreign income tax.

    Legitimate payment of tax includes amounts paid on your behalf. For example, if your employer withholds tax from your payments and pays this tax to the foreign government on your behalf.

    We don't consider you to have paid foreign tax if either of the following applies:

    • you are entitled to a refund of the foreign income tax
    • you receive a benefit that is worked out by reference to the amount of the foreign income tax.

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    Foreign taxes that qualify for the offset

    To count towards a foreign income tax offset (FITO), foreign tax must be imposed under a law other than an Australian law and be one of the following:

    • a tax on income
    • a tax on profits or gains, whether of an income or capital nature
    • a tax that is subject to an agreement covered by the International Tax Agreements Act 1953.

    The following types of foreign taxes do not count towards a foreign income tax offset:

    • inheritance taxes
    • annual wealth taxes
    • net worth tax
    • taxes based on production
    • credit absorption taxes
    • unitary tax.

    You are not entitled to a FITO if you pay tax in another country on a benefit and your employer pays fringe benefits tax in Australia on the same benefit.

    Penalties, fines and interest do not qualify as foreign tax.

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    Claiming a FITO and foreign tax

    You can't claim a FITO before you pay the foreign tax. But you can amend your tax return to claim the FITO after you have paid the foreign tax.

    To claim a FITO, you must have already paid tax in another country. If you have to lodge your Australian tax return before you have paid the tax in the foreign country, you cannot claim the FITO on that tax return. This situation can result from the different income tax years in the other country and Australia.

    Once you have paid the foreign tax, you can seek an amendment to your Australian income tax assessment to claim the FITO. You have up to four years from the date you paid the foreign income tax (or there was a change in the amount of foreign income tax you paid that counts towards the offset) to request an amendment.

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    Deferring paying tax when claiming FITO

    Whether you can defer paying tax because you are going to claim a FITO will depend on the circumstances. Generally, you must pay your assessed income tax by the date provided on your notice of assessment.

    In some circumstances we may allow you to defer the due date for payment. For example, if you are due to pay foreign tax in the coming months and will then amend your Australian return to claim a FITO that will wipe out your tax liability, we may allow a payment deferral.

    You need to ask us for a deferral. If you lodge through a tax agent they will be able to do this for you. Alternately, you can phone us on 13 28 61. If you phone us, you can also discuss other options available.

    Showing you have paid foreign tax

    To be eligible for a FITO, you need written evidence of the foreign tax you actually paid.

    Written evidence of foreign tax paid should include the following details:

    • the amount of foreign income or gains in the foreign currency
    • the foreign tax year in which the income or gains were derived
    • the nature and amount of foreign tax levied on the foreign income or gains
    • the date on which the foreign tax was paid
    • whether the tax paid represents an advance, instalment, or final foreign tax payment in relation to the relevant foreign income or gains.

    Written evidence could be either:

    • a statement from the foreign tax authority setting out the particulars that would normally be recorded on a notice of assessment, a similar official receipt or other document evidencing payment of foreign income tax
    • payslips, payment summaries or similar documents that show the amount of foreign tax paid – we will accept these where there is no requirement in a foreign country to lodge an income tax return
    • a copy of the foreign income tax return accompanied by a receipt verifying that the foreign tax, as calculated on the basis of the return, has been paid
    • a letter from the relevant foreign tax authority stating all taxes for that income year have been paid.

    You do not need to include your evidence when you lodge your Australian tax return, but you must be able to provide it if we ask for it.

    If you use a tax agent to prepare and lodge your return, you need to:

    • tell them if you have earned any assessable income that you paid foreign income tax on
    • provide them with evidence you paid the foreign tax.

    If we need information relevant to your assessment that is held overseas, we will tell you in writing and give you time to get the information.

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      Last modified: 06 Feb 2017QC 23115