ATO Interpretative Decision

ATO ID 2004/607

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the rental income received by an Australian resident taxpayer from real property located in South Africa assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Rental income received by an Australian resident taxpayer from real property located in South Africa is assessable under subsection 6-5(2) of the ITAA 1997.

Facts

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer owns real property located in South Africa.

The taxpayer receives rental income from that property.

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, whether in or out of Australia, during the income year.

Rental income is ordinary income for the purposes of subsection 6-5(2) 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).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one.

Schedule 42 to the Agreements Act contains the double tax agreement between Australia and the Republic of South Africa (the South African Agreement). The South African Agreement operates to avoid the double taxation of income received by Australian and South African residents.

Article 6(1) of the South African Agreement provides that rental income from real property situated in South Africa may be taxed in South Africa.

Paragraph 23 of Taxation Ruling TR 2001/13 states that the phrase 'may be taxed' normally means the source country has a non-exclusive entitlement to tax the income. However, the taxpayer's country of residence may also tax the income subject to the laws of that country, unless the double tax agreement specifically prevents it.

The South African Agreement does not exclude the rental income from being taxable in Australia. Therefore, the rental income may be taxed in Australia and South Africa.

Article 23(1) of the South African Agreement provides that tax paid under the law of South Africa and in accordance with the Agreement, in respect of income derived by a person who is a resident of Australia from sources in South Africa shall be allowed as a credit against Australian tax payable in respect of that income.

Subsection 160AF(1) of the 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, and

•

the amount of Australian tax payable in respect of the foreign income.

Accordingly, as the rental income received by the Australian resident taxpayer from real property located in South Africa is assessable under subsection 6-5(2) of the ITAA 1997, the taxpayer will be entitled to a foreign tax credit for the South African tax paid.

Year of income:  Year ended 30 June 1998 Year ended 30 June 1999 Year ended 30 June 2000 Year ended 30 June 2001 Year ended 30 June 2002 Year ended 30 June 2003

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

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13

Keywords
Double tax agreements
International tax
Rental property
Rental property income
South Africa

Business Line:  Public Groups and International

Date of publication:  23 July 2004

ISSN: 1445-2782