Taxing overseas income in Australian super funds

Superannuation funds earn income and make capital gains and losses just like any other taxpayer, but the tax law requires certain amounts to be included as income and provides concessions, which are unique for super funds. Funds that are regulated under the Superannuation Industry (Supervision) Act are treated as Australian residents and are taxed on their worldwide income.

The fund’s overseas investments can be owned directly in the foreign country, such as listed shares or property, or indirectly, such as managed trusts or listed ETFs. The income earned will usually be paid as interest on bank deposits and bonds; dividends from company shares; and rental income from residential and commercial property.

Any income and capital gains earned by the fund is usually taxed in Australia, but the fund can also be taxed by the overseas country. In some situations, a double tax agreement or treaty may apply to the income. This means the tax will be payable solely in the country where the income was earned or the country where the fund is resident.

If tax has been paid on the income or capital gain, it may be possible to claim a foreign income tax offset. However, offsets may not be available or limited where tax has been paid overseas or other credits arise under the tax laws of the foreign country. To be eligible for a foreign income tax offset, the fund must have paid the tax on the income overseas and have records to prove that the tax has been paid. Any tax offset may be limited to the tax payable in Australia on the income earned from the particular foreign investment, and may not always be the same amount of the tax paid overseas.

As an example, a fund may own an overseas commercial property which earned $A50,000 where the foreign country tax is payable at 20%. The fund is in accumulation phase which means tax of 15% is payable on that income. If an Australian income tax offset is available, then the tax payable would be limited to 15%, which is equal to the tax the fund would have paid under the Australian law. If the foreign income tax offset claimed is more than A$1,000, a foreign income tax offset limit may apply but this is required to be calculated.

Income earned by the fund from an overseas source is unlikely to be in Australian currency. When the income, deduction, tax offset or credit is included in the fund’s tax return it will need to be converted to Australian dollars. There are a number of acceptable ways of converting overseas currency and the prevailing conversion rate or average rate can be used.

It is common that the foreign country in which the fund has invested may have a different tax year to Australia, for example, the UK or the US. Because of this difference, income earned in one tax year of the overseas country may be split over two Australian tax years. So that the income earned is allocated to the correct tax year, it may need to be apportioned to ensure a reasonably accurate amount of income is allocated to the relevant year.

In summary, a superannuation fund may decide to invest internationally to diversify its investment portfolio. However, if income and capital gains have been earned from a foreign source either directly or indirectly, a few things need to be understood about how it may or may not be taxed in Australia or overseas, and whether tax credits or offsets may be available under the Australian income tax law.