ATO Interpretative Decision

ATO ID 2002/549 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as former section 79D of the Income Tax Assessment Act 1936 has been repealed with effect from 1 July 2008. Further, the position stated in this ATO ID in relation to the application of the French Agreement will cease to apply from 1 July 2010 when a new tax treaty with France will enter into force. Despite its withdrawal, this ATO ID continues to be a precedential view in respect of decisions for income years up to, and including, the 2007/2008 income year.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer allowed a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 'contribution droite de bail' and 'contribution additional droite de bail' taxes imposed on their French rental properties against their foreign rental income?

Decision

Yes. The taxpayer is allowed a deduction under section 8-1 of the ITAA 1997 for the 'contribution droite de bail' and 'contribution additional droite de bail' taxes imposed on their French rental properties against their foreign rental income?

Facts

The taxpayer is an Australian resident and holds real property in France from which they derive rental income.

The taxpayer is required to lodge an income tax return in France and pay income tax as assessed on the income from their rental property.

The French taxation system also imposes further taxes on leases. These are known as 'contribution droite de bail' and 'contribution additionnelle droit de bail'. These annual taxes are imposed on leases which are not subject to 'taxe sur la valeur', more commonly referred to as 'value added tax'.

These additional imposts are shown separately on the taxpayer's French annual income tax assessment notice.

Reasons for Decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

In determining liability to Australian tax on foreign sourced income it is necessary to consider any applicable double tax agreements 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 11 to the Agreements Act contains the double tax agreement between Australia and France (the French Agreement). The French Agreement operates to avoid double taxation of income received by Australian and French residents.

Article 5 of the French Agreement provides that French taxation authorities have the right to tax any rental income that is derived from a rental property situated in France and paid to an Australian resident. The French Agreement does not exclude the rental income from being taxable in Australia. The rental income may therefore be taxed in both countries and is assessable in Australia as 'ordinary income' under section 6-5 of the ITAA 1997.

Generally, taxes including income tax are not allowable as an expense incurred in earning assessable income. Subsection 25-5(2) of the ITAA 1997 provides that a deduction cannot be claimed for certain expenditure and at paragraph 25-5(2)(a) specifically includes 'tax' as non deductible expenditure. 'Tax' is further defined at section 995-1 of the ITAA 1997 to mean 'income tax'.

'Contribution droite de bail' and 'contribution additionnelle droit de bail', however, are more akin to the French equivalent of Australian State 'duties'. They are assessed to the owner of the rental property on an annual basis. The 'contribution droite de bail' and 'contribution additionnelle droit de bail' are costs directly incurred by the owner of a French rental property in the course of earning assessable rental income from the property. Like rates, insurance premiums and land tax, they are an ongoing expense of a revenue nature. Therefore the taxpayer is entitled to a deduction for the cost of the 'contribution droite de bail' and 'contribution additionnelle droit de bail' under section 8-1 of the ITAA 1997.

Note: section 79D of the ITAA 1936 limits the amount of foreign income deductions a taxpayer can claim in relation to a class of assessable foreign income, where the amount of the deductions exceed the amount of foreign assessable income of that class. In these instances the deduction to be allowed is limited to the amount of foreign income received.

A taxpayer's foreign rental property income is classified as modified passive income.

Year of income:  Year ended 30 June 2000 Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1936
   section 79D

Related ATO Interpretative Decisions
ATO ID 2002/548

Keywords
Assessable income
Deductions & expenses
Double tax agreements
Foreign income
Foreign loss
France
Rental expenses
Rental property expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  31 May 2002

ISSN: 1445-2782