International taxation and cross-border transactions
This domain tests residence, source, double tax relief and the integrity rules that protect the Australian tax base on inbound and outbound transactions. Expect credit-limit calculations and questions on treaty interaction.
Residence and temporary residents
- Four residence tests: resides in Australia; domicile with a permanent place of abode here; 183 days in the year unless the usual place of abode is overseas and there is no intention to reside; and the 183-day rule for Commonwealth superannuation contributors.
- Temporary residents disregard foreign-source income and capital gains on non-taxable Australian property.
Withholding and source
- Unfranked dividends 30% (reduced to 15% under the US treaty and similar), interest 10% final, royalties 30% reduced to treaty rates, commonly 5–10%.
- Managed investment trust distributions to foreign residents attract 15% withholding.
Double tax relief and integrity
- Division 770 foreign income tax offsets are capped at the Australian tax on the foreign income; excess offsets are not refundable and not carried forward, with a $1,000 de minimis.
- Controlled foreign company rules (Div 7) attribute tainted income where the active income test of 95% fails; transferor trust rules (Div 6AAA) apply separately.
- Division 855 makes non-residents' interests in entities holding mainly Australian real property taxable Australian property, with a 10% participation threshold for entities.
- Thin capitalisation from 1 July 2023 uses a 60% fixed ratio (30% for financial entities) or group ratio, plus the 40% diverted profits tax for significant global entities.
Worked example
An Australian resident earns $40,000 of foreign rent and pays $8,000 foreign tax, with other taxable income of $120,000. Tax on $160,000 is $40,538; tax on $120,000 is $26,788; the offset limit is $13,750. The $8,000 foreign tax is fully creditable, so $8,000 is claimed and no excess arises. Had foreign tax been $20,000, only $13,750 would be allowed and $6,250 lost.
Traps
- Assuming 183 days is conclusive of residence.
- Treating a treaty as overriding domestic law rather than operating through the International Tax Agreements Act 1953.
- Believing excess foreign tax offsets carry forward.
- Forgetting CGT applies to non-residents' taxable Australian property, including since 2016 all entity interests.