ATO Interpretative Decision
ATO ID 2005/311
Income Tax
Assessability of interest income derived by a UK residentFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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 for income derived on or after 1 July 2004 to which the 2003 United Kingdom Convention applies
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 received by a taxpayer, a resident of the United Kingdom (UK), assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The interest income received by a taxpayer, a resident of the UK, is not assessable under subsection 6-5(3) of the ITAA 1997 as it is non-assessable non-exempt income under section 128D of Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer is a resident of the UK and a foreign resident for Australian income tax purposes.
The taxpayer derives interest income from Australian sources.
Non-resident withholding tax at the rate of 10% was deducted from the interest.
Reasons for Decision
Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source. Subsection 995-1(1) of the ITAA 1997 defines foreign resident to mean a person who is not a resident of Australia for the purposes of the ITAA 1936.
Interest income is ordinary income for the purpose subsection 6-5(3) of the ITAA 1997.
Subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income, then it is not assessable income. Section 6-23 of the ITAA 1997 provides that an amount of ordinary income is non-assessable non-exempt income if a provision of the ITAA 1936 or ITAA 1997 or of another Commonwealth law states that it is not assessable income and is not exempt income.
Section 11-55 of the ITAA 1997 provides a list of non-assessable non-exempt income provisions. Included in this list is section 128D of the ITAA 1936 which deals with income subject to withholding tax.
Section 128D of the ITAA 1936 provides that interest upon which withholding tax is payable is not assessable income and is not exempt income.
Interest withholding tax is payable on interest derived by non-residents under subsection 128B(2) of the ITAA 1936.
Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 sets the rates of withholding tax on payments to which subsection 128B(2) of the ITAA 1936 applies. The rate of withholding tax on interest paid to non-residents is 10%. However, this liability to Australian withholding tax is subject to any applicable tax treaty provisions contained in the International Tax Agreements Act 1953 (Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.
Schedule 1 to the Agreements Act contains the tax treaty between Australia and the UK of Great Britain and Northern Ireland (2003 UK Convention). The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents.
Article 11(1) of the 2003 UK Convention states that interest arising in Australia and beneficially owned by a resident of the UK may be taxed in the UK. However, under Article 11(2) of the 2003 UK Convention, the interest may also be taxed in Australia, but the tax charged shall not exceed 10% of the gross amount of the interest.
The interest received by the taxpayer will be subject to withholding tax at the rate of 10% on the gross amount of interest. The interest income is not assessable income under subsection 6-5(3) of the ITAA 1997 as section 128D of the ITAA 1936 applies.
Accordingly, the interest received from Australian sources will not form part of the taxpayer's assessable income under subsection 6-5(3) of the ITAA 1997.
Date of decision: 19 October 2005Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1936
section 128D
subsection 128B(2)
subsection 6-5(3)
subsection 6-15(3)
section 6-23
section 11-55
subsection 995-1(1) Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974
section 7 International Tax Agreements Act 1953
section 4
Schedule 1
Schedule 1, Article 11(1)
Schedule 1, Article 11(2) Related ATO Interpretative Decisions
ATO ID 2003/855
Other References:
ATO GUIDE: PAYG withholding from interest, dividends and royalties to non-residents.
Keywords
Interest income
International tax
Non resident individuals
Non resident interest withholding tax
PAYG withholding
PAYG withholding under dividend, interest & royalty payment category
United Kingdom
ISSN: 1445-2782