Foreign source income means income derived by Australian resident individuals and companies from overseas salaries and foreign assets and businesses (apart from certain salary and wages income).

If the Australian tax payable on the amount earned is greater than the tax paid in the overseas country, the taxpayer is required to remit the difference to the ATO. For example, if the income is $100, the foreign tax $30 and the Australian tax $40, the taxpayer gets a foreign tax credit of $30 and pays $10 in Australian tax. If, however, the foreign tax is $40 and the Australian tax $30, the taxpayer pays no Australian tax. However, refunds are not given. This means that people pay tax at whichever is the higher rate.

Salaries and wages

Salary or wages earned in another country and subject to tax in that country are exempt from Australian income tax where the taxpayer worked overseas for a continuous period of at least three months (1936 Act s.23AG).

If the taxpayer derives income in the same year from Australia, however, the exempt overseas income is taken into account in working out the tax on the Australian income.

Investment income

Foreign earnings that are not exempt are subject to the general foreign tax credit system.

Australia has a network of double tax agreements with most of its major trading partners. These have little impact on wage and salary workers, but may affect the taxation of investment income.

Any problem about the application of double tax agreements is likely to require expert advice. The ATO is a first port of call, but it may be necessary to consult one of the large accounting or law firms with expertise in the area.