ATO Interpretative Decision
ATO ID 2003/141
International tax
Assessability of interest from term deposit in IndiaFOI status: may be released
-
This ATO ID has been amended to remove references in the Reasons for Decision to repealed legislation dealing with foreign tax credit rules. With effect from 1 July 2008 the foreign tax credit system will be replaced by the foreign tax offset system.
This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
Status of this decision: Decision Current
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is the interest income derived by a resident taxpayer from sources in India assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The interest income derived by a resident taxpayer from sources in India 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 has invested in India a sum of money in a term deposit account denominated in a foreign currency.
The taxpayer derives interest income from the term deposit account.
The taxpayer is unable to use the money in Australia due to foreign currency restrictions.
The taxpayer can access the money only in India.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Under subsection 6-5(4) of the ITAA 1997 a taxpayer is taken to have received an amount of ordinary income when the amount is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.
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 35 to the Agreements Act contains the double tax agreement between Australia and the Republic of India (the Indian Agreement). The Indian Agreement operates to avoid the double taxation of income received by Australian and Indian residents.
Paragraph (1) of Article 11 of the Indian Agreement provides that interest arising in India, to which a resident of Australia is beneficially entitled, may be taxed in Australia.
Under paragraph (2) of Article 11 of the Indian Agreement, interest from sources in India may also be taxed in India but the rate of tax is not to exceed 15% of the gross amount.
Sub-paragraph (1)(a) of Article 24 of the Indian Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in India will be allowed against Australian tax payable on income from sources in India.
Although the taxpayer is unable to use the money in Australia due to foreign currency restrictions, the taxpayer is taken to have received the interest income when the interest is credited to the term deposit account or dealt with in any way as the taxpayer has directed. Accordingly, the taxpayer's assessable income includes the interest derived from India under subsection 6-5(2) of the ITAA 1997.
If the Indian tax has been paid in relation to this interest, a foreign tax credit will be allowed. If the Indian tax paid on the interest is less than the Australian tax that will be payable, then the taxpayer will be entitled to a full credit for the Indian tax paid.
Date of decision: 5 February 2003Year of income: Year ended 30 June 2002 Year ending 30 June 2003 Year ending 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
subsection 6-5(2)
subsection 6-5(4)
section 4
Schedule 35, Article 11
Schedule 35, paragraph (1) of Article 11
Schedule 35, paragraph (2) of Article 11
Schedule 35, paragraph (1) of Article 24 Related ATO Interpretative Decisions
ATO ID 2002/886
Keywords
Double tax agreements
Foreign income
Foreign tax credits
India
Interest income
International tax
ISSN: 1445-2782