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ATO Interpretative Decision

ATO ID 2002/56

Income Tax

Assessability of rental income received from Germany - foreign tax credits
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does rental income received from Germany form part of an Australian resident taxpayer's assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. As the taxpayer is a resident of Australia, they are required to include the rental income in their assessable income under section 6-5 of the ITAA 1997 but a foreign tax credit will be allowed for the foreign tax paid.

Facts

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer owns a property in Germany from which they received rental income.

The taxpayer has paid tax on this income in Germany.

Reasons for Decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

As the taxpayer is a resident of Australia the rental income forms part of their assessable income under section 6-5 of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Schedule 9 to the Agreements Act contains the double tax agreement between Australia and Germany (the German Agreement). The German Agreement operates to avoid the double taxation of income received by Australian and German residents.

Article 6 of the German Agreement provides that the German taxation authorities have the right to tax any rental income that is derived from a rental property situated in Germany and paid to a resident of Australia. The German Agreement does not exclude the rental income from being taxable in Australia. The rental income may therefore be taxed in both countries.

Paragraph (1) of Article 22 of the German Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in Germany will be allowed against Australian tax payable on income from German sources.

Subsection 160AF(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of:

-
the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or
-
the amount of Australian tax payable in respect of the foreign income.

The German rental income received by the taxpayer forms part of their assessable income under section 6-5 of the ITAA 1997. As German tax has been paid in relation to this rental income a foreign tax credit will be allowed.

Note: If the German tax paid on the rental income is less than the Australian tax payable the taxpayer will be entitled to a full credit for the German tax paid. Where the German tax paid is greater than the Australian tax payable, the taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess German tax paid. However, under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any future tax payable on the taxpayer's foreign rental income.

Date of decision:  15 November 2001

Year of income:  Year ended 30 June 1995 Year ended 30 June 1996 Year ended 30 June 1997 Year ended 30 June 1998 Year ended 30 June 1999

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(2)

Income Tax Assessment Act 1936
   section 160AF
   subsection 160AF(1)
   section 160AFE

International Tax Agreements Act 1953
   Schedule 9, Article 6
   Schedule 9, Article 22(1)

Related ATO Interpretative Decisions
ATO ID 2002/55

Keywords
Foreign tax credits
Double tax agreements
Rental property income

Business Line:  Small Business/Individual Taxpayers

Date of publication:  24 January 2002

ISSN: 1445-2782

history
  Date: Version:
You are here 15 November 2001 Original statement
  28 August 2002 Archived

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