Australian residents running businesses overseas often think that foreign business losses always reduce their Australian taxable income. However, this isn’t always true. The Australian Taxation Office (ATO) has strict guidelines for foreign income and losses. In many cases, foreign business losses are not exempt from income tax, which means you must report them and may face limitations.
Here’s what you need to know to stay compliant and avoid unexpected tax bills.
Need Help Navigating Foreign Business Income or Losses?
What Are Foreign Business Losses?
A foreign business loss happens when your overseas business expenses are higher than the income it generates. While it may seem logical to deduct these losses from your Australian income, such as wages or rental income, the ATO has restrictions to limit this advantage.
When Are Foreign Business Losses Not Exempt?
There are several cases in which your foreign losses cannot offset your Australian assessable income:
- Non-Commercial Loss Rules Apply: If your foreign business is a small venture or doesn’t meet the ATO’s commercial criteria, the loss may be quarantined. You can only apply it to future income from the same business, not to your Australian salary or other income.
- Foreign Income Exemption Removal: In the past, some foreign employment income was exempt from Australian tax. Recent legal changes now require most foreign income to be declared. You cannot use foreign losses to decrease it unless specific conditions are met.
- Lack of Active Business Tests: If your foreign operation doesn’t meet the assessable income, profit, or real property tests, the ATO may reject your claims for losses in Australia.
- No Evidence of Business Activity: You need to keep detailed records of all foreign transactions, income, and expenses. Without proper documentation, the ATO can entirely reject your loss claims.
Don’t let complex tax rules catch you off guard.
What You Can Do
While foreign losses may not always lower your taxable income this year, you can often carry them forward to future years if conditions are met. A qualified tax adviser can:
- Review whether your losses are commercial
- Determine if you meet the ATO’s business activity criteria
- Help lodge or amend your return correctly
- Maximize legal offsets and carry-forward opportunities
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