ATO Interpretative Decision

ATO ID 2002/431 (Withdrawn)

Income Tax

• ATO ID 2002/431 has been withdrawn from the database because it contains references to the tax treaty between Australia and New Zealand that was replaced with a new tax treaty which entered into force on 19 March 2010. Despite its withdrawal from the database, this ATO ID continues to be a precedential view in respect of decisions up to, and including, 30 June 2010.
  This ATOID has been amended to remove references in the Reasons for Decision to repealed legislation dealing with foreign tax credit rules.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does interest received from New Zealand (NZ) 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 interest income in their assessable income under section 6-5 of the ITAA 1997, but a foreign tax credit will be allowed for foreign tax paid.

Facts

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer receives interest income which is derived in NZ.

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 interest income forms part of their assessable income under 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 4 to the Agreements Act contains the double tax agreement between Australia and NZ (the NZ Agreement). The NZ Agreement operates to avoid the double taxation of income received by Australian and NZ residents.

Paragraph (2) of Article 11 of the NZ Agreement provides that NZ may tax interest that arises in that country, but the rate of tax is not to exceed 10% of the gross amount of that interest.

Paragraph (2) of Article 24 of the NZ Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in NZ will be allowed against Australian tax payable on income from NZ sources.

The NZ interest income received by the taxpayer forms part of their assessable income under section 6-5 of the ITAA 1997. If NZ tax is paid in relation to this interest a foreign tax credit will be allowed. If the NZ tax is less than the Australian tax that will be payable, then the taxpayer will be entitled to a full credit for the NZ tax paid.

Year of income:  Year ended 30 June 2001

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

Keywords
Double tax agreements
Foreign tax credits
Foreign income
Interest income
New Zealand

Business Line:  Small Business/Individual Taxpayers

Date of publication:  12 April 2002

ISSN: 1445-2782