Do you have any amounts of offshore income you haven't declared to the ATO – perhaps interest from a foreign bank account? Even if it seems like a small amount, it must be declared. International data-sharing arrangements are making taxpayers' overseas financial affairs increasingly transparent, so don't get caught out.

The ATO is reminding taxpayers about their obligation to report foreign income, and it's keen to emphasise that its techniques for detecting offshore amounts are becoming increasingly effective. Cross-border cooperation between different tax jurisdictions means Australians' financial information is being shared more than ever before – increasing the odds of your affairs being uncovered by the ATO.

Failing to report foreign income can attract penalties and ATO scrutiny of a taxpayer's broader tax affairs.

How is foreign income taxed?

If you are an Australian resident for tax purposes, you are taxed on your worldwide income. This means you must declare all foreign income sources in your return. You should consider whether you've earned any amounts from:

  • investments held overseas, such as dividends, rental income from properties and interest from bank deposits;
  • overseas pensions;
  • overseas employment, including salary and directors' fees; and
  • the sale of offshore assets (ie capital gains).

Remember, if you have already paid tax on this kind of income overseas, you still need to declare it to the ATO. You may be able to claim an offset (subject to a certain limit if the claim exceeds $1,000) for the tax already paid in order to prevent double taxation.

All foreign income figures must be converted to Australian dollars according to particular exchange rate rules, and amounts that were earned in countries that don't have an income year ending 30 June may need to be apportioned.

Are you a "resident"?

You will only be subject to Australian tax on your foreign income if you are an Australian resident for tax purposes. If you are a non-resident, you will generally only pay tax on your Australian-sourced income.

Being an Australian resident for tax purposes is different to immigration concepts of residency, and nationality is generally not relevant. So even if you aren't an Australian citizen or permanent resident, you could be a resident for tax purposes.

The main test for tax residency is whether someone "resides" in Australia. There's no single factor that determines whether this test is met. Instead, it requires a weighing up of all relevant circumstances, including things like the the person's intentions, their family and living arrangements, business and employment ties, and so on.

However, even if someone doesn't currently "reside" in Australia for tax purposes, they may still be a resident for tax purposes under several alternative tests (including where both their "domicile" and permanent place of abode are maintained in Australia).

Making a voluntary disclosure

If you think you may have omitted some foreign income from a previous tax return, you can make a voluntary disclosure to the ATO and arrange to pay any tax owed. Voluntary disclosures will often result in a reduction of the ATO penalties and interest that would otherwise apply – and the outcome is generally much more favourable if the disclosure is made before the ATO commences an audit of your affairs. Given the ATO's increased powers to detect offshore amounts, taxpayers with unreported income should think seriously about the benefits of proactive disclosure.