The importance of determining sources of income
As an individual, you must pay tax to the Government in proportion to your earnings for the financial year period. In addition to the marginal tax income rates that are used to calculate the base amount of tax payable, taxpayers may be eligible to claim deductions or offsets that may further reduce the amount of tax payable.
In Australia, it is important to verify the source of income as it determines the tax treatment upon that income and who it is originates from – residents and non-residents. All income is required when assessing the tax bracket and the amount that a person is required to pay. This ensures that everyone is paying the correct amount of tax. Without this proper calculation, then the amount of tax that tax payers and businesses have to pay may be too much, or too little and when the ATO realises, they may be fined if they are under reporting their income.
Ordinary income is income from rendering personal services, income from property and income from carrying on trading activities. Statutory income is income which is made assessable by specific provisions of the tax law e.g. Capital gains, Foreign currency gains, Recoupment of tax depreciation claims etc.
An Australian resident, for tax purposes, is assessable on ordinary and statutory income derived directly or indirectly from all sources, whether in or out of Australia.
If a resident receives income from overseas, they must declare that income in their Australian income tax return, even if they paid tax on it in the country from which they received it. If foreign tax has been paid on their foreign income, they may be entitled to an Australian foreign income tax offset (FITO), which provides relief from double taxation. All foreign income, deductions and foreign tax paid must be converted to Australian dollars.
Personal Income Tax Returns address all significant financial transactions by the taxpayer for the year. So this includes not only income from employment and wages but also regular income from investments and rental properties as well as one-off payments as a result of the sale of assets. Additionally, any losses incurred during the period also affects the net amount of taxable income and hence the total amount of tax payable by the taxpayer.
A non-resident is only assessable on ordinary and statutory income which is sourced in Australia.
Here at The Quinn Group, our team of experienced Tax Agents and Accountants can help assist you with lodging your tax return or all other tax and ATO related issues. For more information, or a FREE Tax Record Kit, please submit an online enquiry, or call us on 1300 QUINNS (784 667).