What Is Assessable Income & What Australian Business Owners Should Understand Before Moving Offshore

Introduction

If you are an Australian business owner exploring offshore structures, the first question is what income the ATO already treats as assessable. A structure built around the wrong income profile unexpectedly creates new assessable income — or cannot shelter the income it was designed to protect.

This guide explains what assessable income means for Australian business owners planning an offshore move, why income type determines what a structure can legitimately achieve, & which categories of income remain assessable regardless of where an offshore entity sits.

Interactive Tool: Check If Your Income & Business Remain Taxable in Australia

Why Assessable Income Is the Starting Point for Any Offshore Conversation

How Misunderstanding of Assessable Income Causes Offshore Structure Failures

Australian business owners routinely pursue offshore structures without first mapping what income sits in their assessable pool, yet proper offshore structure design & planning that starts with income mapping can prevent the costly failures that follow. A structure is built to shelter particular income, then the owner discovers it cannot legally keep that income outside Australia’s tax net. 

Under section 6-5(2) of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997‘), Australian resident taxpayers are taxed on assessable income from all sources worldwide — not just Australian-sourced income.

The second common failure is even pricier: an offshore structure that unexpectedly creates new assessable income. This happens when the structure triggers attribution rules that pull income back into the Australian tax system even though no cash has moved. At that point, the structure is generating additional tax exposure rather than sheltering anything.

Why Income Type Determines What a Structure Can Legitimately Achieve

The question of what an offshore structure can achieve depends entirely on the character of the income flowing through it. Business income, personal income, & passive income each interact with Australian tax law differently — a structure that works for one category will fail for another. Classification must happen before any structuring conversation begins.

The distinction between ordinary income under section 6-5 of the ITAA 1997 & statutory income under section 6–10 matters because certain income categories are pulled into assessable income by legislation regardless of what structure receives them. 

A consulting fee paid offshore for work performed by an Australian resident still carries its original character. The income type drives the tax outcome — not the entity name on the invoice.

What Assessable Income Actually Means for an Australian Business

Ordinary Income Under Section 6-5

Ordinary income is the revenue an Australian business earns in the normal course of its operations. Under section 6-5 of the ITAA 1997, almost everything a business earns from day-to-day trading falls here first.

The meaning of ordinary income is drawn from case law. In Scott v Commissioner of Taxation (1935) 3 ATD 142 (‘Scott‘), the court said income is “not a term of art” & must be determined “following the ordinary concepts & usages of mankind.” Common examples include:

• trading revenue;
• service fees;
• interest on business deposits; and
• rental income.

Under section 6-5(2), Australian resident taxpayers are taxed on ordinary income from all sources worldwide.

Statutory Income Under Section 6-10

Statutory income catches amounts that do not qualify as ordinary income but are specifically pulled into the assessable pool by tax legislation. Section 6-10 of the ITAA 1997 & the list in section 10-5 identify these amounts, including:

• net capital gains;
• franking credits grossed up on dividends;
• royalties; and
• recovered bad debts.

The most consequential item for Australian business owners is income attributed under the CFC rules. CFC attributed income is assessable even when no distribution has been made. The income sits offshore, no cash has moved, but Australian tax is triggered anyway — this is where offshore structures most commonly create unexpected Australian tax liabilities.

What Falls Outside the Assessable Pool

Not all receipts are assessable. Section 6-20 of the ITAA 1997 carves out exempt income, while section 6-23 identifies non-assessable non-exempt (NANE) income — amounts that sit completely outside the assessable pool. Unlike exempt income, NANE income is not considered when working out tax losses.

NANE income is particularly relevant for offshore planning. Certain foreign income may qualify as NANE, shielding it from Australian tax. Whether a particular income stream can legitimately reach NANE status depends on the structure, the entity’s residency, & how the income arises — the answer is never automatic.

What Assessable Income Means for the Individual Business Owner

Sources of an Individual Owner’s Assessable Income

Australian business owners often assume that shifting business income offshore also shelters what the owner personally receives. However, the business & its owner are separate taxpayers, & an offshore structure does not change what counts as the owner’s individual assessable income.

Key sources that remain assessable regardless of any restructure include:

• Salary & director fees: assessable employment income, even when paid by an entity operating offshore.
• Dividends: the grossed-up amount including franking credits is assessable, with a tax offset attached.
• Personal services income (PSI): where more than 50% of a contract amount reflects an individual’s labour rather than assets or a business structure, PSI cannot be diverted offshore through an interposed entity. The PSI rules attribute that income directly to the individual, regardless of which entity receives the payment.

Why the Owner & Business Distinction Matters for Offshore Planning

Understanding the owner’s personal assessable income profile separately from the business’s profile is necessary before any offshore planning begins.

The worldwide income principle under section 6-5(2) of the ITAA 1997 applies to both the company & the individual owner. An offshore structure changes which entity receives certain income but does not change that principle.

Without this distinction, an owner risks building a structure that solves the business-level problem while leaving the individual fully exposed to Australian tax on salary, dividends, & distributions.

What Australia Can Tax When an Offshore Structure Exists

For Australian business owners, a genuinely non-resident offshore entity is taxed in Australia only on Australian-sourced income. Income earned outside Australia by a genuinely non-resident entity is not assessable here at the entity level.

This position rests on two provisions of the ITAA 1997:

1. Section 6-5(3), which includes ordinary income from Australian sources in a foreign resident’s assessable income; and
2. Section 6-10(5), which does the same for statutory income from Australian sources.

Active offshore business income earned by a properly structured non-resident company can sit outside Australia’s tax net. However, if central management & control sits in Australia, the entity risks being treated as an Australian tax resident — bringing its worldwide income into the Australian tax net.

In practice, this is where an offshore company that looks separate on paper still ends up inside the Australian tax net — because where decisions are actually made determines the tax outcome, not where the company is registered.

Income Types That Frequently Create Unexpected Assessable Income

Passive Income & Controlled Foreign Company Rules

Australian business owners who establish offshore holding companies to accumulate passive income — such as:

• interest on retained cash;
• dividends from investment portfolios; or
• royalties from intellectual property

often assume that income is sheltered offshore until distributed. That assumption breaks against the worldwide income principle.

CFC attributed income is assessable even when no distribution has been made — an offshore holding company accumulating passive income can create an Australian tax liability for its Australian owner every year, whether any cash moves.

Deemed Dividends & Division 7A

Australian business owners who use company funds for personal purposes — for example:

• drawing on company accounts;
• directing payments offshore for personal benefit; or
• moving company money into their personal sphere —

Can find those amounts recharacterised as assessable income. Dividends & franking credits on business investments are amounts that must be included in the tax return as assessable income. The distinction between business income & personal drawings is not one the Australian Taxation Office overlooks.

When amounts are treated as deemed distributions to shareholders without proper structuring, the franking credits that would ordinarily attach to a formal dividend may not be available to offset the tax. The tax cost can end up significantly higher than anticipated.

Personal Services Income & Offshore Entities

Australian business owners who earn income through consulting, contracting, or professional services often believe they can redirect that income through an offshore entity to achieve a lower effective tax rate. The PSI rules prevent this. Income is classified as PSI when more than 50% of the amount received by a business for a contract was for an individual’s labour, skills or expertise, rather than being generated by assets, the sale of goods, or from a business structure.

Where PSI rules apply, PSI cannot be diverted offshore through an interposed entity — the offshore entity becomes irrelevant to the individual’s Australian tax position. The PSI rules affect how the income must be reported & what deductions can be claimed, regardless of what entity nominally receives the payment.

Trust Distributions From Offshore Structures

Australian business owners who assume an offshore trust automatically shelters income from Australian assessable income are frequently wrong. Australian residents must include all foreign income in their tax return, whether from an Australian source or an overseas source — the worldwide income principle applies to trust distributions as it does to all other income.

The assessability of distributions from offshore trusts to Australian beneficiaries depends on:

• the residency of the trustee;
• the source of the trust’s income; and
• the character of the underlying income.

Offshore trust structures can be genuinely effective in some circumstances. However, the source of income analysis & the derivation rules under sections 6-5(4) & 6-10(3) of the ITAA 1997 determine when & how that income enters the Australian tax net.

A Practical Checklist for Mapping Income Before Offshore Structuring

Mapping Business-Level Income Sources

Before any offshore structure is considered, Australian business owners need a clear picture of what the business earns, & departure tax and CGT planning is a critical part of that pre-structuring picture. The first question is whether the primary revenue is active trading income — from selling goods or services — or passive returns from investments, interest, & royalties. 

A trading business sits in a fundamentally different position from one that collects dividends & licensing fees.

International revenue must also be mapped to the entity receiving it & the basis of receipt. Royalties & licensing fees held in an offshore related entity are tainted income under the CFC rules, assessable to Australian shareholders even without any distribution. Related-party transactions not reviewed before an offshore entity is introduced create pricing exposure that compounds once the new structure is in place.

Mapping Individual-Level Income Sources

The business & its owner are separate taxpayers, & the individual’s income must be mapped independently. Several categories of individual income remain assessable regardless of any offshore structure:

• Salary & director fees: assessable regardless of any offshore structure;
• Dividends from the Australian company: remain assessable after any restructure; and
• Trust distributions: require clarity on income character & source before any offshore step.

PSI cannot be diverted offshore through an interposed entity. Adding a new offshore structure on top of unreviewed offshore assets compounds CFC exposure rather than containing it.

Conclusion

Understanding assessable income before structuring is the difference between a compliant offshore plan & one that creates unexpected Australian tax liabilities. The distinction between the business & its owner matters, as do the CFC rules, PSI limitations, & the worldwide income principle that applies to Australian residents.

If you are considering an offshore structure, speak with WealthSafe’s offshore structuring specialists before you act. WealthSafe helps Australian business owners design structures that are legal, defensible, & aligned with how their business actually operates.

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