Employment income – Salary, wages, allowances and most cash compensation is included in your assessable income for that year. Most noncash employment benefits you get are subject to Fringe Benefits Tax (FBT), payable by the employer.
Self-employment and business income – The taxable income from self-employment or from a business is subject to Australian tax. In a partnership, each partner is taxed on their share of the taxable income.
Directors’ fees – Directors’ fees are included in your assessable income as personal earnings and are taxed in the year of receipt.
Dividends – If you’re a resident shareholder, dividends are included in your assessable income. Franked dividends (that is, dividends paid from taxed corporate profits) paid by Australian corporations are grossed up for the underlying corporate taxes paid. You may claim the underlying corporate tax as a credit in your personal tax return. Whether additional tax must be paid on the franked dividends by a shareholder depends on your marginal tax rate. Under certain circumstances, excess credits may be refunded.
If you’re a non-resident, dividends from Australian sources are generally subject to a final withholding tax of 30% (or 15% under applicable treaties) on the unfranked portion (that is, the portion paid from untaxed corporate profits).
If you’re an Australian resident, foreign-source dividends are included in your assessable income. If tax was paid in the foreign country, a foreign income tax offset (broadly equal to the lower of the foreign tax paid or the amount of the Australian tax payable, capped at any applicable treaty tax rates) is allowed.
Temporary residents are not assessable on foreign source investment income and gains.
Interest, royalties and rental income – If you’re a resident, interest, royalties and rental income are included in your assessable income with a deduction allowed for applicable expenses. Eligibility for building depreciation deductions on a rental property depends on the building’s nature and its construction rate.
If you’re a resident, you may claim a foreign income tax offset on tax paid in a foreign country on foreign rental income. This is broadly equal to the lower of the foreign tax paid or the amount of Australian tax payable. If the foreign investment results in a tax loss (that is, deductible expenses exceed assessable income), the tax loss can be offset against all Australian assessable income.
Temporary residents aren’t assessable on foreign investment income and, consequently, may not offset foreign expenses or losses against other assessable Australian income.
If you’re a resident, interest paid to a non-resident lender is subject to a final withholding tax of 10%.
If you’re a non-resident, interest paid to a non-resident lender (for example, an overseas mortgagee) is exempt from the interest withholding tax. Royalties paid to non-residents are generally subject to a final withholding tax of 30% (or 10% to 15% under applicable treaties).
Converting transactions denominated in foreign currency into Australian dollar amounts – If you pay tax, you’re generally required to convert income paid in foreign currency into Australian dollars (AUD) to calculate your income. Likewise, you must convert expense amounts into Australian dollar amounts at the time of payment. This also applies to assessable income or allowable deductions for residents (but not temporary residents) who have acquired or disposed of foreign currency rights and liabilities. For resident taxpayers, these rules normally apply to foreign-currency debt (for example, mortgages) and foreign-currency accounts (for example, bank accounts). Special rules apply to the acquisition or disposal of capital assets or depreciable assets.
Certain elections can change the amounts of assessable income or allowable deductions arising under the foreign-currency rules and/or reduce the compliance burden. However, because of the significant tax implications of the elections, taxpayers should seek specific advice suited to their circumstances.
The above rules provide limited exceptions for certain assets and obligations. Proposed reforms to simplify these rules have been announced. However, at the time of writing, the reforms had not yet been legislated.
Temporary residents may be exempt from the above tax rules on certain foreign-currency denominated accounts that are located outside Australia.
Concessions for individuals living away from home – Limited tax concessions are available if you have to live away from home for employment purposes and maintain a home for your use in Australia. If this is available, it’s generally limited to a maximum period of 12 months. These concessions typically don’t apply to foreign employees working temporarily in Australia.
A limited number of other benefits may be provided on a concessionally taxed basis if you’re permanently relocating to Australia.
Taxation of employer-provided stock options – Discounts provided to employees on shares or options acquired under an employee share scheme (ESS) are generally included as ordinary income in your assessable income for that year. The governing rules are complex and professional advice should be sought.
A qualifying share or option is a share or option acquired under an ESS that satisfies certain prescribed conditions.
The taxable discount amount for shares is generally the difference between the market value of the share and the amount you paid. For options, the discount is the greater of the following two amounts:
- the amount equal to the share value less exercise price
- the value determined according to a formula similar to the Black and Scholes model for valuing exchange-traded options
No tax withholding obligation is imposed in Australia for benefits under employee share schemes, unless you fail to give your employer your Australian Tax File Number (TFN) by the end of the financial year.