Tax on Overseas Income and the Importance of Saving on FX Conversion

Jun 12, 2020

If you earn money overseas then it is well known that when it comes to your annual ATO tax returns, all foreign overseas income must be reported in addition to your domestic income.

Examples of overseas income that require reporting include: 

  • Acquisition of an overseas rental property
  • Trading stock valuations
  • Translation of foreign currency rental expenses
  • Translation of foreign currency rental income
  • Translation of notional interest amounts under a hire purchase arrangement
  • Translation of profit on notional sale under a hire purchase arrangement

Pretty much any revenue driving activity.

The General Translation Rule

When reporting overseas income you need to follow the ATO’s ‘general translation rule’. According to the ATO “Under the general translation rule, all tax-relevant amounts that are denominated in a foreign currency must be translated into Australian currency (unless falling within certain limited exceptions). This enables all gains and losses to be calculated using a common unit of measurement – the Australian dollar.”

How does the ATO get its rates under the general translation rule? From the 1st January 2020 the ATO has been using rates supplied by the Reserve Bank of Australia and prior to this the ATO used data from Commonwealth Bank. In other words the ATO uses the interbank exchange rate.

Crucially, the general translation rule applies regardless of whether the foreign income is remitted to Australia or not. So if you’ve remitted funds to Australia at a significantly worse exchange rate than the interbank rate you’re not only losing a significant chunk of money at the time of the exchange but you may also have to report a higher AUD amount in your tax returns.

Understanding Your Forex Spreads

Depending on your forex volumes and the forex provider of your choice you could be losing anywhere from 0.01% - 5% on your foreign exchange transactions. If you’re an individual or SME with small FX volumes, who is using a bank or PayPal to conduct their foreign exchange, then the chances are it’s closer to the later figure. The very tight spreads are generally only reserved for the major global corporate players.

If you’re unaware of the spreads you’re currently being charged then the best place to start is to figure this out. There are two ways to do this. Firstly you can simply ask your FX provider what spreads they have charged you on all of your previous trades and they should be happy to provide this information. The more open they are in responding the chances are the better the rate you got.

Secondly, if you aren’t able to do this, then this option is pretty easy to do as well. Simply search for the interbank exchange rate on the day you made the trade (trying to get as close as possible to the time you made the trade) and calculate the percentage difference between the rate you achieved and what the interbank exchange rate was.

If you can only get the daily exchange rate then this shouldn’t be too much of a problem - if you have multiple trades you should start to see a pattern appearing. For example if your calculations showed results of 1.92%, 2.03% and 2.09% the chances are you’re currently being charged a 2% spread.

Remember that the size of the transaction will normally impact the spread so if you’ve traded significantly different amounts then it’s likely different spreads were charged. Still, you should be able to get a rough indication.

The Forex Solution

Money transfers in Australia are on the increase and so too are the number of dedicated money transfer firms. The best money transfer firms should be able to save you bucket loads on your foreign exchange. We’re not saying that’s in all cases but if you’re on a standard pricing matrix with your bank then it’s highly likely you’ll be able to save by switching to a dedicated money transfer firm.

With TransferWise for example, if you use their multi-currency account solution (for individuals and businesses alike) converting a GBP balance to AUD will cost you just 0.37%, while USD to AUD conversion will come in at 0.45%. In fact, an independent researcher compared TransferWise to the banks in Australia. They found that TransferWise was up to 10x cheaper for money transfers abroad.

Then you have the likes of OFX (formerly known as OzForex) on the scene too. Whilst these guys won’t be able to give you specific advice as to when to trade, they’re knowledgeable on the markets and the potential ramifications on exchange rates should certain economic or political events unfold in the market. The chances are you won’t be able to achieve as tight a spread as if you’d have used TransferWise but by trading your currency at the right time, the rate you could achieve may be drastically better one week or even day to the next.

Foreign Income Tax Offset

Don’t forget that if you’re being taxed on your income abroad, you claim the foreign income tax offset in your income tax return.

Just as with your overseas income, you have to convert all foreign income deductions and foreign tax paid to Australian dollars. Depending on whether your foreign income tax offset is below or above $1,000 there are slightly different requirements. Below $1,000 you only need to record the actual amount of foreign income tax paid that counts towards the offset. If you are claiming a foreign income tax offset of more than $1,000, you have to work out your foreign income tax offset limit. You aren’t allowed to claim above your tax offset limit - more information on calculating your offset limit is available from the ATO.

As a non-refundable tax offset, the foreign income tax offset reduces your income tax payable.

 

 

Tags: BudgetFinancial PlanningPersonal taxTravel

Author: Christian Almer

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