Should the international income of an Australian resident be taxed on a worldwide or territorial basis?

Many countries impose income tax on the worldwide income of their residents or citizens. This is the case in Australia where ‘Australian residents for tax purposes’ must pay income tax on their worldwide income including statutory income such as capital gains and dividends. If the government of a country adopts a ‘worldwide’ basis for imposing income tax on its residents then the existence of tax havens and offshore financial centres becomes an important issue because income from passive investments may not be disclosed and subsequently taxed in Australia. The Australian Government has recently funded ‘Operation Wickenby’, in an attempt to detect Australians using tax havens and reinforcing the integrity of a worldwide taxation system. This paper will start with a discussion of the philosophical basis for Australia having adopted a ‘worldwide’ system of taxation as opposed to a ‘territorial system’ and then examine the problems with collecting income tax on foreign sourced income generated by Australian residents. The paper will then draw a conclusion as to the merits of Australia adopting a territorial system for taxing foreign income and whether the worldwide system should be abandoned altogether.