Foreign Income Tax Australia 2026-27: FITO Explained

Quick answer

If you are an Australian resident for tax purposes, you must declare your worldwide income — salary earned in Singapore, dividends from US shares, rent from a flat in London, interest in an Indian bank account, all of it — even if you already paid tax on it overseas. The good news: you usually do not pay tax twice. The foreign income tax offset (FITO) credits the foreign tax you paid against your Australian tax bill. The bad news: the credit is capped, it cannot be carried forward, and the cap calculation quietly includes your Medicare levy. Get any of it wrong and you either overpay or cop an ATO data-matching letter. This guide walks through the rules with real 2026-27 numbers.

Who has to declare foreign income?

The ATO’s rule is blunt: Australian residents are taxed on worldwide income. That covers employment income, business income, pensions and annuities, rental income, dividends, interest, and capital gains on overseas assets. It does not matter whether the money ever enters an Australian bank account. If you earned it while a resident, it goes on your return.

Two groups are treated differently:

• Temporary residents — typically people on temporary visas (for example, a subclass 482 visa) whose spouse is also not an Australian resident under social security law. Temporary residents generally only declare Australian-source income, capital gains on taxable Australian property, and in certain circumstances income from employment or services performed overseas. Other foreign income does not have to be declared.
• Non-residents — taxed only on Australian-source income. See our guide to CGT for non-residents.

Residency for tax purposes is not the same as citizenship or visa status. The ATO applies four tests — resides, domicile, 183-day, and Commonwealth superannuation — and the answer can surprise people who spend half the year abroad. If you are unsure, work it out before you lodge; everything in this article flows from getting residency right.

How the foreign income tax offset works

The FITO is a non-refundable tax offset. It reduces your Australian tax payable — including Medicare levy and Medicare levy surcharge — but only down to zero. Any unused offset is not refunded and cannot be carried forward to a later year. That ‘use it or lose it’ property is the single most important thing about the FITO, and it is why the limit calculation below matters.

There are two tiers:

• FITO of $1,000 or less: simply record the actual foreign income tax paid that counts towards the offset. No limit calculation required.
• FITO over $1,000: you must work out the FITO limit. Your offset is the lesser of the foreign tax you paid and the limit.

The FITO limit, step by step

The limit is the Australian tax attributable to the double-taxed foreign income:

1. Work out the Australian tax (including Medicare levy, ignoring other offsets) on your total taxable income.
2. Work out the Australian tax (same basis) on your taxable income excluding the foreign income on which foreign tax was paid.
3. Subtract step 2 from step 1. That is your limit.

Both legs include the 2% Medicare levy — a detail most guides skip, and it changes the answer. Let us see it in action.

Worked example 1: US dividends, limit does not bite

Sarah earns a $90,000 Australian salary and receives US dividends of $5,000 gross. The US withholds 15% under the treaty — $750 — so $4,250 lands in her account.

Step 1 — declare the gross amount. Sarah declares $5,000, not $4,250. This is the gross-up rule: your assessable foreign income is the amount before foreign withholding. Declaring only what hit your account is the most common FITO mistake.

Step 2 — tax on total taxable income ($95,000). Using 2026-27 resident rates: 16% on the slice from $18,201 to $45,000 is $4,288; 30% on the slice from $45,001 to $95,000 is $15,000. Income tax $19,288, plus 2% Medicare levy of $1,900, for a total of $21,188.

Step 3 — tax excluding the foreign income ($90,000). Income tax: $4,288 plus 30% on $45,000, which is $13,500 — $17,788. Plus Medicare of $1,800: $19,588.

Step 4 — the limit. $21,188 minus $19,588 = $1,600. Sarah paid $750 in US tax, which is below the limit, so she claims the full $750. Her final tax: $21,188 minus $750 = $20,438. No double tax, nothing wasted.

Worked example 2: when the cap bites and money is lost

Daniel earns a $60,000 Australian salary and $40,000 of foreign employment income on which he paid $18,000 of foreign tax — a 45% effective rate, higher than Australia’s. His taxable income is $100,000.

Tax on $100,000: $4,288 plus 30% on $55,000 ($16,500) = $20,788, plus Medicare of $2,000 = $22,788.

Tax on $60,000 (excluding foreign income): $4,288 plus 30% on $15,000 ($4,500) = $8,788, plus Medicare of $1,200 = $9,988.

The limit: $22,788 minus $9,988 = $12,800. Daniel paid $18,000 abroad but can only claim $12,800. The remaining $5,200 is gone — not refunded, not carried forward, not recoverable in any later year. His final Australian tax is $22,788 minus $12,800 = $9,988, exactly the tax on his Australian income alone.

This is the scenario the tidy dividend examples never show. If the foreign country’s rate exceeds your Australian marginal rate on that income, expect to lose the difference. There is no planning trick that recovers it after the fact — which is why people with large foreign-tax bills should get advice before the income year ends, not at lodgment time.

The W-8BEN trap: 30% withholding is not lost money

If you hold US shares or ETFs directly, your broker should have a valid W-8BEN on file. It certifies you are an Australian resident and cuts US dividend withholding from the default 30% to the treaty rate of 15%. The form is filed with your broker, not the IRS, and lasts three years.

Here is what most guides get wrong: if you never filed a W-8BEN and 30% was withheld, that extra 15% is not lost. It is foreign tax paid, and it counts towards your FITO just like the first 15%. On $4,000 of US dividends, no W-8BEN means $1,200 withheld instead of $600 — but the extra $600 still credits against your Australian tax, up to the FITO limit. The real costs are cash-flow (your money sits with the IRS until assessment) and limit risk (if your limit binds, the excess is wasted). File the form anyway — it is free and takes minutes — but do not panic if a past dividend was withheld at 30%.

One more US point: the US generally does not tax non-resident investors on capital gains from selling US shares or ETFs. You still owe Australian CGT on the gain, converted to Australian dollars, with the 50% discount if you held the asset for more than 12 months. Our ETF tax guide covers the Australian side in detail.

The section 23AG myth: overseas work is usually NOT exempt

Ask around expat forums and someone will always claim that working overseas for 91 days makes your salary tax-free in Australia. That is a mangled version of section 23AG, and for most people it is simply wrong.

The exemption only applies if all four conditions are met: you are an Australian resident, you are engaged in continuous foreign service as an employee for 91 days or more, your service is directly attributable to specific activities — delivery of Australian official development assistance, operating a declared developing-country or disaster relief fund, work for a prescribed charitable or religious institution, deployment as a member of a disciplined force, or an Austrade-approved overseas project — and no non-exemption conditions apply.

Mark, a software contractor who spends 200 days a year working for clients in Singapore, fails the third condition. His income is fully assessable in Australia, and his remedy is the FITO for the Singapore tax he paid — not an exemption. If someone tells you ’91 days and you are exempt,’ ask them which of the five eligible activities your job falls under. For ordinary commercial work, the answer is none.

Temporary residents: the contrast case

Priya arrives on a 482 visa. Her spouse is not an Australian resident either. She earns an Australian salary and also earns $3,000 of interest on a bank account back home. As a temporary resident, she declares her Australian salary but generally does not declare the foreign interest. If she later becomes a permanent resident, the same interest becomes assessable worldwide income — and any Indian tax withheld on it becomes creditable through the FITO (the Australia–India treaty caps Indian tax on interest at 15%). Same person, same bank account, completely different answer: residency status is everything.

Other foreign income you must not forget

• Foreign rental income: declare the gross rent, claim deductions for expenses (agent fees, repairs, interest) the same way as for Australian property. Convert everything to Australian dollars.
• Foreign pensions and annuities: generally assessable. Some foreign pensions have specific treaty treatment — check the treaty for your country before assuming a pension is tax-free.
• Capital gains on overseas assets: selling a property or shares abroad is a CGT event in Australia too. The 50% discount applies if you held the asset for more than 12 months. Note that from 1 July 2027 the CGT discount rules change — see our CGT reform guide before timing a sale around the boundary.
• Crypto on foreign exchanges: the exchange’s location does not matter. If you are a resident, gains on crypto held on an overseas exchange are Australian CGT events.

Exchange rates and records

Convert each foreign amount to Australian dollars at the exchange rate on the day you received it — the RBA publishes daily rates, and the ATO accepts them. Keep records showing:

• the amount of foreign income or gains in the foreign currency;
• the foreign tax year in which the income was derived;
• the nature and amount of foreign tax levied;
• the date the foreign tax was paid; and
• whether the tax paid was an advance, instalment, or final payment.

Dividend statements, foreign tax assessments, and payslips usually cover all five. If the foreign tax is paid after the year in which you declared the income, you can amend that year’s assessment to claim the offset. And a quiet warning: Australia exchanges financial-account information with over 100 jurisdictions under the Common Reporting Standard. The ATO already receives data on many offshore accounts. Declaring is not optional in practice — it is a question of whether you declare it yourself or explain why you did not.

Common mistakes

• Declaring the net amount after foreign withholding instead of the gross. You lose part of your FITO and understate income in one move.
• Forgetting the FITO entirely — paying full Australian tax on income already taxed abroad. If you have ever lodged without claiming it, an amendment may recover it.
• Assuming 23AG exempts ordinary overseas work. It does not. See above.
• Assuming overseas means invisible. CRS data-sharing means the ATO very likely already knows about the account.
• Claiming both an offset and a deduction for the same foreign tax. You cannot double-dip. If your offset would be wasted because you owe no Australian tax, ask your tax agent about claiming a deduction for the foreign tax instead — in some situations that still gives value where an offset cannot.
• Ignoring foreign CGT. Selling the overseas flat is an Australian CGT event, even if the money never comes home.
• Letting a W-8BEN lapse. It expires after three years; brokers do not always remind you.

Tips

• Run the limit early. If you expect a large foreign-tax bill, estimate the FITO limit before 30 June. If the cap will bite, that is the time to talk to an adviser — not in October.
• File the W-8BEN on day one of any US investing, and diary its three-year expiry.
• Keep foreign tax documents even when the offset is under $1,000. The ATO can ask for evidence years later.
• Check the treaty. Australia has double-tax agreements with more than 40 countries, and the withholding caps differ by income type — dividends, interest, and royalties each have their own rate.
• Use the ATO’s FITO worksheet for offsets over $1,000 rather than guessing the limit; the subtraction must use the same basis (including Medicare, ignoring other offsets) in both legs.
• Amend, don’t ignore. If foreign tax was paid late or you missed the offset, amend the relevant year’s return. Voluntary disclosure also sharply reduces penalties if you discover undeclared foreign income from earlier years.

FAQ

Do I declare foreign income if I already paid tax on it overseas?

Yes. Declare the gross income, then claim the foreign income tax offset for the foreign tax paid. Paying tax overseas never removes the Australian declaration obligation — it only reduces the Australian tax through the offset.

Is money sent by family overseas taxable?

A genuine one-off gift is generally not income. But if the money is regular, supports your lifestyle, comes from a company or trust, or is really payment for your services, the ATO may treat it as income. Labels do not decide it — substance does.

What about income I earned before moving to Australia?

Income earned before you became an Australian resident is generally not assessable here. The worldwide-income rule starts when your residency starts. Keep evidence of the date your residency began.

The foreign tax year does not match the Australian year. Which year do I claim in?

Claim the offset in the year the related income is assessable in Australia. If the foreign tax is paid later, amend that year’s assessment once it is paid.

I live overseas but am still an Australian resident. Do I still lodge?

Yes. Residents must lodge an Australian return on worldwide income even while living abroad. If you have become a non-resident, you generally still lodge if you have Australian-source income.

I have not declared foreign income in earlier years. What now?

Make a voluntary disclosure. It usually sharply reduces penalties and interest compared with waiting for the ATO to find it — and with CRS data-sharing, discovery is increasingly a matter of when, not if. A tax agent can help you work through the amendments.

Conclusion

Foreign income is not a loophole and it is not double tax — it is worldwide income plus a credit. Declare the gross amount, claim the offset, and watch the two traps that catch people out: the FITO limit, which silently throws away foreign tax above the Australian tax on that income, and the section 23AG myth, which convinces ordinary overseas workers they are exempt when they are not. File the W-8BEN, keep the records, and run the limit before 30 June rather than after. If your situation spans several countries, treaties, and income types, that is exactly when a tax agent earns their fee — the rules are mechanical, but the interactions are not. Use our income tax calculator to model how foreign income changes your Australian bill, and read our tax offsets guide for how the FITO sits alongside LITO, SAPTO, and the rest.

Sources: ATO — Foreign income tax offset rules guide (FITO limit, gross-up rule, $1,000 threshold); ATO — Australian resident for tax purposes; ATO — Exempt income from foreign service (section 23AG); IRS / broker guides — Form W-8BEN and the Australia–US treaty 15% dividend rate. General information only, not personal tax advice.