ATO Interpretative Decision
ATO ID 2004/140
Income Tax
Assessability of interest income received by a dual resident of Australia and the United StatesFOI status: may be released
-
This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 of a dual resident of Australia and the United States (US) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The interest income of a dual resident of Australia and the US is not assessable under subsection 6-5(2) of the ITAA 1997 as they are deemed to be a resident of the US for the purposes of the US double tax Convention.
Facts
The taxpayer is a citizen of the US.
The taxpayer is a resident of Australia for taxation purposes.
The taxpayer is a resident of the US for taxation purposes.
The taxpayer's habitual abode and personal and economic ties are in the US.
The taxpayer receives interest income from US sources.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Interest 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 (Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the 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 agreement between Australia and the US (the US Convention). The US Convention operates to avoid the double taxation of income received by Australian and US residents.
As the taxpayer is a dual resident, it is necessary to consider the tie breaker rules in the US Convention.
Article 4(2) of the US Convention sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income under the US Convention. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.
Article 4(2) of the US Convention provides that if an individual is a resident of both Australia and the US, they shall be deemed to be a resident of the State:
- (a)
- in which they maintain a permanent home
- (b)
- if the provisions of (a) do not apply, in which they have an habitual abode, or
- (c)
- if the provisions of (a) and (b) do not apply, with which their personal and economic relations are closer.
As the taxpayer's habitual abode and personal and economic ties are in the US, the taxpayer will be considered a resident of the US under the US Convention.
Article 11(1) of the US Convention provides that interest income arising in the US, to which a resident of Australia is beneficially entitled, may be taxed in Australia.
As the taxpayer is resident of the US under the US Convention, Article 11(1) does not give Australia any taxing rights on the taxpayer's US sourced interest income.
Accordingly, the US sourced interest income received by the dual resident taxpayer does not from part of the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.
Date of decision: 21 November 2003Year of income: Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
subsection 6-5(2)
section 4
Schedule 2
Schedule 2, Article 4(2)
Schedule 2, Article 11(1)
Keywords
Double tax agreements
Interest income
International law
Residency
Treaties
United States
ISSN: 1445-2782