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ATO Interpretative Decision

ATO ID 2003/718

Income Tax

Assessability of rental income from real property situated in the United States of America
FOI status: may be released
  • This ATO ID has been amended to add a note regarding former section 79D of the Income Tax Assessment Act 1936 (ITAA 1936) which has been repealed with effect from 1 July 2008. The ATO ID is still current.
    This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

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

Decision

Yes. The rental income received by an Australian resident taxpayer from a real property located in the US 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 the US.

The taxpayer receives rental income from that property.

The taxpayer did not pay income tax in the US as the taxpayer made an overall loss from the renting out of the 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 2 to the Agreements Act contains the double tax convention between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the protocol amending the US Convention (the US Protocol). The US Convention and the US Protocol operate to avoid double taxation of income received by Australian and US residents.

Article 6(1) of the US Convention provides that income from real property may be taxed by the country in which the real property is situated.

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 country of residence of the taxpayer may also tax the income subject to the laws of that country, unless the double tax agreement explicitly prevents it.

Accordingly, the rental income received by the Australian resident taxpayer from the real property located in the US is assessable under subsection 6-5(2) of the ITAA 1997.

Note 1: For income years up to, and including, the 2007-08 income year, the limitation on deductions for foreign income under former section 79D of the Income Tax Assessment Act 1936 needs to be considered if there is an overall loss from the rental property.
Note 2: With effect from 1 July 2008 foreign losses are no longer quarantined from domestic income as former section 79D of the Income Tax Assessment Act 1936 has been repealed. There is no longer a distinction between a foreign loss and a domestic loss for the purpose of calculating taxable income. If the taxpayer pays US tax on the rental income, the taxpayer will be entitled to a foreign income tax offset.

Date of decision:  28 July 2003

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   section 79D

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

International Tax Agreements Act 1953
   section 4
   Schedule 2
   Schedule 2, Article 6(1)
   Schedule 2A

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

Keywords
Double tax agreements
International tax
Rental property
Rental property income
United States

Siebel/TDMS Reference Number:  3547532

Business Line:  Public Groups and International

Date of publication:  15 August 2003

ISSN: 1445-2782


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