3.2.4 Target Foreign Income

Summary

This topic explains the assessment of target foreign income (1.1.T.05) for the FTB, CCB and baby bonus income tests and covers the following:

• definition of target foreign income,
• individuals with target foreign income,
• assessing target foreign income, and
• access to 'blocked' target foreign income.

Definition of target foreign income

Target foreign income is a component of ATI (1.1.A.20). Target foreign income for FTB, CCB and baby bonus purposes is the amount of an individual's foreign income that is neither taxable income, nor received in the form of a fringe benefit. It also includes income exempted from income tax under section 23AF and section 23AG of the Income Tax Assessment Act 1936.

Act reference: FAAct Schedule 3 clause 5(1) Target foreign income

SSAct section 10A(2)-'foreign income'

Individuals with target foreign income

There are many situations where individuals may have target foreign income.

Examples: Individuals who have target foreign income may include:

• residents employed outside Australia (1.1.A.120) whose foreign employment income is not taxable in Australia, including those employees of international organisations such as the United Nations, and employees of approved overseas projects,
• residents who receive gifts or allowances of money from any foreign source on a regular basis, including those receiving regular money or gifts from relatives living overseas, which are exempt from Australian tax,
• residents who receive income from foreign business interests or investments which are exempt from Australian tax, including migrants with business interests in their country of origin,
• newly arrived migrants who expect to receive foreign income in the current year that is not subject to tax in Australia,
• non-residents, partnered to Australian residents (1.1.A.130), working in Australia for overseas companies, organisations or governments, including civil servants and defence personnel posted to Australia, non-residents working temporarily at Australian education institutions or visiting students, and
• residents who receive an overseas pension or benefit that is not taxable income under the Income Tax Assessment Act.

Assessing target foreign income

When new FTB or CCB claims or reassessments are made, individuals are asked to state the amount of target foreign income they expect to receive in the current tax year. For the purposes of the baby bonus income test, individuals need to state the amount for the relevant 6-month income test period following the birth of the child, or the child's entry into care (see 4.5.1 for further details on how the income test period is defined). The income must relate to the Australian tax year even if this is different from the source country's tax year.

Individuals with income from foreign business interests can deduct allowable business expenses from that income amount. Discretion is needed when deciding to verify an individual's declared target foreign income. If an individual is unsure whether their foreign income is taxable in Australia, the ATO can clarify their taxation status.

Foreign income, after it is converted to Australian dollars, is a component of ATI. The FAO will convert the income using the exchange rates in the table below. The conversion rate is the 'on demand airmail buying rate', available at the CBA on 1 July for the tax year in which the income is received. If the on demand airmail buying rate is not available for a particular country, then another exchange rate from the CBA or another financial institution can be used.

Note: Tax exempt foreign income does not need to be converted as the source of that income is Australia.

If the on demand airmail buying rate for a particular currency is not available, the exchange rate to be used is the rate available on the last working day before 1 July.

The following table shows the exchange rates for 1 July 2010 and 1 July 2011.

Act reference: FAAct Schedule 3 clause 5(2) If it is necessary, ... work out an amount of target foreign income..., Schedule 3 clause 5(3) If there is no market exchange rate..., Schedule 3 clause 5(4) For the purposes of this clause, … the appropriate market exchange rate…

Policy reference: FA Guide 2.4.1 Eligibility for Baby Bonus

Access to 'blocked' foreign income

If foreign income cannot be accessed in Australia, it is not assessable income for FTB, CCB or baby bonus purposes. This may occur when access is so limited that the income is not 'earned, derived or received for the person's own use or benefit'.

Explanation: Some countries have strict exchange control regulations that prevent an individual gaining access to income in that country, usually unless the individual is actually in that country. There may also be restrictions on how this money can be withdrawn or spent.

FTB and CCB would need to be reassessed if the individual visited the country in which they have blocked income, and they gain access to the money.

Baby bonus is not subject to reassessment, as the estimate is based on the 'best efforts' of the individual at the time the claim is made.

Act reference: FAAct Schedule 3 clause 5(1) Target foreign income

SSAct section 10A(2)-'foreign income'

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Last reviewed: 3 January 2012