ATO Interpretative Decision
ATO ID 2009/93
Income Tax
Income Tax: assessability of rental income received by Australian resident from the United KingdomFOI 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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 from real property located in the United Kingdom (UK) 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 from real property located in the UK is assessable under subsection 6-5(2) of the ITAA 1997. However, the taxpayer is entitled to a foreign income tax offset under Division 770 of the ITAA 1997.
Facts
The taxpayer is a resident of Australia.
The taxpayer owns real property located in the UK and receives rental income from the property.
The taxpayer has paid UK tax on the rental income.
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 tax treaty, 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.
Schedule 1 to the Agreements Act contains the tax treaty between Australia and the United Kingdom of Great Britain and Northern Ireland and the Notes to the agreement (the 2003 UK Convention). The 2003 UK Convention operates to avoid double taxation of income received by Australian and UK residents.
Article 6(1) of the 2003 UK Convention provides that income derived by a resident of Australia 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 tax treaty explicitly prevents it.
As the taxpayer is a resident of Australia who owns real property situated in the UK, the rental income derived by the taxpayer may be taxed in Australia and the UK.
Consequently the rental income received by the Australian resident from real property located in the UK is assessable under subsection 6-5(2) of the ITAA 1997.
Article 22(1)(a) of the 2003 UK Convention provides that, subject to the provisions of the laws of Australia, a credit against Australian tax payable shall be allowed for UK tax paid (in accordance with the law of Australia) where tax has been paid under UK law and in accordance with the 2003 UK Convention.
As UK tax has been paid by the taxpayer in respect of the same income that is subject to tax by the taxpayer in Australia, Australia is required to provide taxation relief under the 2003 UK Convention.
Division 770 of the ITAA 1997 allows a foreign income tax offset for foreign tax that a taxpayer has paid on income that is included in the taxpayer's assessable income.
The general rule under section 770-10 of the ITAA 1997 is that, to qualify for an offset for an income year, the taxpayer must have paid foreign income tax on an amount that is included in its assessable income for that year, though there are exceptions in certain situations, such as where the tax has been deducted as source, or otherwise paid on the taxpayer's behalf (section 770-130 of the ITAA 1997).
As UK tax has been imposed and paid on the rental income which is included in the taxpayer's assessable income in Australia, the taxpayer is entitled to a foreign income tax offset.
Date of decision: 19 August 2009Year of income: Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1997
subsection 6-5(2)
Division 770
section 770-10
section 770-130
section 4
Schedule 1
Schedule 1, Article 6(1)
Schedule 1, Article 22(1)(a)
Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13
ATO ID 2005/72
Keywords
Double tax agreements
International tax
Rental property
Rental property income
United Kingdom
ISSN: 1445-2782