Updated for the 2026–27 financial year
If you are an Australian resident for tax purposes, you are taxed on your worldwide income. That means income from foreign shares, overseas rental properties, foreign bank accounts and most foreign pensions must be declared in your Australian tax return, even if the money never leaves the country it was earned in. The good news is that if you have already paid tax overseas on that income, you may be entitled to a foreign income tax offset, which provides relief from being taxed twice on the same income.
Is Foreign Investment Income Taxable in Australia?
Yes. If you are an Australian resident, your assessable income includes income you earn from anywhere in the world. The ATO confirms that if you have assessable income from overseas, you must declare it in your Australian income tax return. This applies whether you keep the income overseas or bring it back to Australia.
To prevent the same income being taxed in both countries, Australia offers a foreign income tax offset. If you have paid foreign tax in another country, you may be entitled to this offset, which reduces your Australian tax. You can read the ATO’s full explanation of the eligibility and rules for the foreign income tax offset.
Quick Answers to the Most Common Questions
Do I have to declare my foreign income? Yes, if you are an Australian resident for tax purposes you must declare your worldwide income.
Is foreign investment income taxable? Yes, for Australian residents it is generally assessable in Australia at your marginal tax rate.
Can foreign income ever be exempt? Some foreign income, such as certain government or war related pensions, can be exempt under a tax treaty. Most private pensions and investment income are assessable.
Will I be taxed twice? Usually not. If you have paid foreign tax on income that is also taxable in Australia, the foreign income tax offset is designed to relieve double taxation.
Does Your Tax Residency Decide What You Pay?
Your tax residency is the single most important factor in working out what you pay. Australian residents declare their worldwide income. Foreign residents generally only declare income that has an Australian source.
It is important to understand that the ATO does not use the same residency rules as the Department of Home Affairs. You can be an Australian resident for tax purposes without being an Australian citizen or permanent resident, and you may hold a visa to enter Australia without being an Australian resident for tax purposes.
The Four Residency Tests
There are four statutory tests used to determine your Australian tax residency. You only need to satisfy one of them to be a resident.
- The resides test. This is the primary test. If you reside in Australia, you are a resident for tax purposes and do not need to consider the other tests. The ATO looks at factors such as your physical presence, your intention and purpose, your family, business or employment ties, where your assets are kept, and your social and living arrangements.
- The domicile test. You are a resident if your domicile, meaning your permanent home by law, is in Australia, unless the ATO is satisfied your permanent place of abode is outside Australia. A domicile can be by origin, meaning where you were born, or by choice, meaning where you have changed your home with the intention of making it permanent.
- The 183 day test. You are a resident if you are present in Australia for more than half the income year, whether continuously or with breaks, unless your usual place of abode is outside Australia and you have no intention of taking up residence here.
- The Commonwealth superannuation test. This applies to Australian Government employees working at posts overseas who are contributing members of the Commonwealth Superannuation Scheme (CSS) or the Public Sector Superannuation Scheme (PSS). It does not apply to members of the Public Sector Superannuation Accumulation Plan (PSSAP). If you satisfy this test, you, along with your spouse and children under 16, are an Australian resident regardless of any other factors.
A 2013 legal decision shows that a person who fails to cut their connection with Australia will be treated as an Australian resident. You can review the four tests in detail on the ATO page about your tax residency.
What Happens When Your Residency Changes Mid Year
If your status changes from resident to foreign resident during the income year, you answer “yes” to the question “Are you an Australian resident?” on your tax return, so you are taxed at resident rates for that income year. You are entitled to a pro rata tax free threshold for the number of months you were an Australian resident.
Foreign residents do not have to pay the Medicare levy and can claim the number of days in the income year they are not an Australian resident as exempt days. From the date you cease to be an Australian resident, you do not need to return your foreign source income in your tax return. Australian sourced interest, dividends and royalties received after you cease to be a resident are subject to withholding tax as a final tax and should not be included in your return.
Keep in mind that if you have a HELP, VET Student Loan or Australian Apprenticeship Support Loan debt, you may still need to report your worldwide income to work out your repayment obligations.
What Counts as Foreign Investment Income?
Foreign investment income is assessable income that comes from sources outside Australia. The most common types include foreign interest, dividends from foreign shares, foreign rental income, foreign pensions and annuities, and capital gains on overseas assets.
Foreign Interest and Dividends
Interest earned from overseas bank accounts or bonds, and dividends received from foreign shares, are assessable in Australia and taxed at your marginal tax rate. Some countries withhold tax on these payments before you receive them. Where foreign tax has been paid, that amount may count towards your foreign income tax offset, reducing the risk of being taxed twice.
Foreign Rental Income
Income from rental properties located outside Australia must be declared. You may claim eligible expenses, such as repairs and maintenance, loan interest and property management fees, against that income. If you have paid foreign tax on the rental income, that foreign tax may count towards your foreign income tax offset.
Capital Gains Tax on Foreign Shares and Overseas Property
If you are an Australian resident, your capital gains on overseas assets are treated in the same way as your capital gains on Australian property. This means the same capital gains tax rules apply when you sell foreign shares or overseas property.
If you make a capital gain that is taxable in Australia and you have paid foreign tax on it, you may be entitled to a foreign income tax offset. Remember that you must convert the sale proceeds, the cost base and any foreign tax paid into Australian dollars. The ATO explains the treatment of capital gains on overseas assets in more detail.
How Are Foreign Pensions Taxed in Australia?
Most foreign pensions are assessable income in Australia and must be declared. Some pensions, however, are exempt under specific tax treaties. Where a pension is exempt, it should not be shown on your return, although exempt income can still affect the tax you pay on your other income. How a particular pension is taxed depends on the country it comes from and the tax treaty between that country and Australia.
UK Pensions and Lump Sums
The taxation of UK pension income depends on your tax residency and visa status, and the Double Taxation Agreement between the UK and Australia determines where the income is taxable. Importantly, this is not a choice you make; UK lump sums and regular pension income may be taxable in the UK, Australia or both.
For a permanent resident of Australia, the UK pension is generally only taxable in Australia. It would be omitted from any UK non resident tax return and included only on your Australian return. To receive your pension gross with no UK tax deducted, an application is required to obtain an NT (No Tax) PAYE coding from HMRC for each UK pension scheme. This NT coding applies to pension income only and does not apply to any lump sum payments. You can read more about the treatment of UK pensions and lump sums.
New Zealand Pensions and KiwiSaver
Under the trans-Tasman retirement saving portability Arrangement, individuals can transfer retirement savings between an Australian complying superannuation fund and a New Zealand KiwiSaver scheme when they move between the two countries. The Arrangement, signed on 16 July 2009, makes these transfers voluntary, and funds are not obliged to accept transferred savings.
New Zealand sourced retirement savings transferred into Australia are treated as personal contributions and are subject to the non-concessional contributions cap on their initial entry into the Australian superannuation system. They are not taxed on entry and form part of the tax free component of your super interest. These savings may only be held in complying funds regulated by the Australian Prudential Regulation Authority, may not be held in a self managed superannuation fund, and may not be transferred to a third country. They may be accessed when the member reaches the New Zealand age of retirement, currently 65. Full detail is available in the Treasury explanatory material on trans-Tasman portability.
German Pensions
Australia and Germany signed a new tax treaty on 13 November 2015, replacing the previous agreement signed in 1972. Under the treaty, pensions are generally taxable only in the country of residence of the recipient.
There are some specific rules to be aware of. Social security benefits first paid after 31 December 2016 may also be taxed by the source country, but that source country tax is limited to 15 per cent of the gross payment. War persecution and similar pensions are exempt from taxation under the treaty. If you have had too much withholding tax deducted, a refund of overpaid withholding tax must be requested within 4 years of receiving the relevant income. You can read the announcement of the new tax treaty signed with Germany.
Reducing Your Pension Tax With the Undeducted Purchase Price
If you receive a foreign pension or annuity, you may be entitled to reduce the taxable amount through the undeducted purchase price, or UPP. The UPP is the amount you contributed towards the purchase price of your pension or annuity, being your personal after tax contributions for which you did not claim a tax deduction at the time. The part of your annual pension income that represents a return of these personal contributions is free from tax, and this tax free portion is called the deductible amount of the UPP.
Only some foreign pensions and annuities have a UPP. The deductible amount is usually calculated by dividing the UPP by a life expectancy factor. There are some country specific shortcuts:
- For a United Kingdom State Pension category A pension or category B widows pension, you can calculate your deduction by multiplying your UK State Pension (in Australian dollars) by 8 per cent. If you receive a UK State Pension category C or D pension, you are not entitled to a deductible amount.
- For a Dutch old age pension, or a widows, widowers or orphans pension from the Sociale Verzekeringsbank (SVB), if you cannot determine the deductible amount you can claim an annual deductible amount equal to 25 per cent of your gross pension payment.
For pensions from other countries, such as Austria, Germany or Italy, or where you cannot work out your deductible amount, you must complete a Request for a determination of the deductible amount of UPP of a foreign pension or annuity. The ATO addresses this request as a private binding ruling, which is legally binding on the Commissioner, and your tax return is processed once the ruling is finalised.
On the supplementary tax return, foreign pension or annuity income is shown at question 20 label D, and the deductible amount of UPP is written at question D11 label Y. The ATO sets out the process for the deductible UPP amount of a foreign pension or annuity.
Lump Sum Pension Payments for an Earlier Year
Sometimes a foreign pension provider pays a lump sum that relates to an earlier income year, which is a common scenario with UK pensions. Where a payment relates to an earlier year, it generally needs to be reported in line with the year it relates to rather than simply lumped into the current year. Because the rules around this can affect how much tax you pay, it is worth getting advice on the correct treatment for your situation.
How Does a Foreign Pension Affect the Australian Age Pension?
Receiving a foreign pension can affect your eligibility for the Australian Age Pension and other Centrelink payments, because foreign pension income is generally counted under the income and assets tests used to work out your entitlement. The tax treatment of your foreign pension and its effect on your Centrelink payments are two separate questions, and a pension that is assessable for tax purposes may be treated differently for means testing. Because the rules are detailed and depend on your circumstances, it is best to confirm how your foreign pension is treated with Services Australia.
Converting Foreign Income to Australian Dollars
Before you work out your tax, you must convert all foreign income, deductions and foreign tax paid into Australian dollars. There are generally two ways to do this. You can use the exchange rate that applied on the date of the transaction, or, for regular payments such as a monthly pension, you can use an average annual exchange rate. The ATO publishes foreign exchange rates and provides a foreign income conversion calculator to help you work out the correct Australian dollar amounts.
Avoiding Double Tax With the Foreign Income Tax Offset
The foreign income tax offset, often called the FITO, is a non-refundable tax offset that reduces your income tax payable, including your Medicare levy and Medicare levy surcharge. It is designed to relieve double taxation where the same income is taxed both overseas and in Australia. These rules apply for income years that start on or after 1 July 2008.
To be entitled to the offset, you must meet two conditions. First, you must have actually paid, or be deemed to have paid, an amount of foreign income tax. Second, you must include the income or gain on which you paid that foreign tax in your assessable income. The offset can only be claimed after the foreign tax is paid. Under the tax offset ordering rules, the FITO is applied after all other non-refundable and non-transferable offsets. Once your tax payable is reduced to nil, any unused FITO is not refunded to you and cannot be carried forward to later years.
Claiming $1,000 or Less
If you are claiming an offset of $1,000 or less, the process is simple. You only need to record the actual amount of foreign income tax paid that counts towards the offset, up to $1,000. There is no offset limit calculation required at this level.
Claiming More Than $1,000: The Offset Limit
If you are claiming a foreign income tax offset of more than $1,000, you must first work out your foreign income tax offset limit, which may reduce your offset to that limit. The limit is based on a comparison between your actual tax liability and the tax liability you would have if certain foreign taxed and foreign sourced income, and related deductions, were disregarded. The steps are:
- Step 1. Work out the income tax payable, including Medicare levy and Medicare levy surcharge, for the year, excluding penalties and interest and disregarding any tax offsets.
- Step 2. Work out the income tax that would be payable if your assessable income did not include the amounts on which foreign income tax was paid, plus any other non-Australian source income or gains, and you were not entitled to certain related deductions.
- Step 3. Subtract the result of step 2 from step 1. If the result is greater than $1,000, that is your offset limit.
Some deductions are not disregarded at step 2. For example, gifts, contributions, superannuation and tax agent fees are not considered reasonably related to foreign taxed income, so they are not disregarded. Debt deductions are only disregarded where they are attributable to an overseas permanent establishment. Any foreign income tax paid above your offset limit cannot be refunded or carried forward. The ATO sets out the calculation in its guide on how to calculate your FITO or offset limit.
Worked Example: How the Offset Limit Works
In ATO Example 16, Anna was an Australian resident for the year ended 30 June 2024. She had total assessable income of A$34,000, total allowable deductions of A$2,870, and a taxable income of A$31,130. The tax on her taxable income, including the Medicare levy, was $3,079.30.
Anna had paid total foreign income tax of A$3,400, so she needed to work out her offset limit. After disregarding A$12,000 of foreign income and A$700 of related expenses, her taxable income under the step 2 assumptions was A$19,830. The tax on $19,830 was $309.70, with no Medicare levy applied because $19,830 was below the Medicare low income threshold.
Her foreign income tax offset limit was $3,079.30 minus $309.70, which equals $2,769.60. Although Anna paid foreign income tax of $3,400, her offset was limited to $2,769.60. The difference of $630.40 could not be refunded or carried forward to a later year.
What Records You Need and Claiming a Later Year
To claim a foreign income tax offset, you need to keep adequate records of your foreign income and the foreign tax you paid, such as foreign tax statements or assessments. If you paid foreign income tax after the year in which the related income or gains were included in your Australian tax return, you can still claim the offset by requesting an amended assessment for that year. You have up to 4 years to request an amendment from the date you paid the foreign income tax.
How Does the ATO Know About Your Foreign Income?
It is increasingly difficult for foreign income to go unnoticed. Australia has tax treaties and data sharing arrangements with many countries, and through the Common Reporting Standard, foreign tax authorities and financial institutions share account and income information with the ATO. This means the ATO often already has details of your overseas accounts, investments and pensions before you lodge your return.
Because of this, declaring your foreign income correctly is the safest path. Failing to report foreign income can lead to amended assessments, interest charges and penalties. If you are unsure whether something needs to be declared, it is far better to check than to leave it off.
Get Help With Your Specific Foreign Income Situation
Foreign investment income tax in Australia comes down to a few clear principles. If you are an Australian resident, you are taxed on your worldwide income and must declare your foreign shares, rental income and pensions. You convert everything into Australian dollars, and where you have paid foreign tax, the foreign income tax offset helps make sure you are not taxed twice on the same income.
The detail, however, varies a great deal from country to country and from person to person. The treatment of a UK pension differs from a German or New Zealand pension, the undeducted purchase price can reduce your tax in ways that are easy to miss, and the offset limit can catch people out when their foreign tax is high relative to their Australian income. If you want certainty about how your specific foreign income should be reported and how to claim every offset and deduction you are entitled to, the next step is to speak with a professional who can review your situation in full.
About The Author: Artur Osadchiy
Artur is a Certified Practising Accountant with over 30 years’ experience working as a trusted advisor to 600+ clients across Australia. Based in Melbourne, he started Tax Window with his wife Marina in 2009 and leads the firm’s tax and accounting team. In his free time, Artur enjoys watching the AFL (go Kangas!) and spending time with family.
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