ATO Interpretative Decision

ATO ID 2004/127

Income Tax

Assessability of Australian sourced interest income received by a Netherlands resident
FOI 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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 Australian sourced interest income received by a Netherlands resident taxpayer assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. Australian sourced interest income received by a Netherlands resident taxpayer is not assessable under subsection 6-5(3) of the ITAA 1997 as it is exempt under section 128D of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

The taxpayer is a resident of the Netherlands.

The taxpayer receives interest income from Australian sources.

Reasons for Decision

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

Interest is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

Section 6-15 of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. An amount is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law (subsection 6-20(1) of the ITAA 1997).

Section 11-10 of the ITAA 1997 lists provisions about exempt income. Included in this list is section 128D of the ITAA 1936.

Section 128D of the ITAA 1936 provides that interest upon which withholding tax is payable shall not be included in assessable income.

A non-resident is liable for withholding tax on interest under subsection 128B(2) of the ITAA 1936.

Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 provides that the rate of withholding tax on interest paid to non residents is generally 10%.

In determining liability to Australian tax on Australian sourced income received by a non-resident, 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 ITAA 1997 so that those Acts are read as one.

Schedule 10 to the Agreements Act contains the agreement between Australia and the Netherlands (the Netherlands Agreement). Schedule 10A to the Agreements Act contains the Second Protocol to the Netherlands Agreement (the Second Protocol). The Netherlands Agreement and the Second Protocol operate to avoid the double taxation of income received by residents of Australia and the Netherlands.

Article 11(1) of the Netherlands Agreement states that interest arising in Australia, being interest to which a resident of the Netherlands is beneficially entitled, may be taxed in the Netherlands.

Article 11(2) of the Netherlands Agreement states that such interest may be also taxed in Australia and according to the law of Australia, but the tax so charged shall not exceed 10 percent of the gross amount of interest.

Therefore, the taxpayer's interest income may be taxed in the Netherlands and in Australia.

Subsection 128B(2) of the ITAA 1936 provides that the taxpayer will be subject to 10% withholding tax on the gross amount of interest derived from Australia. As the interest is subject to withholding tax, it is exempt under section 128D of the ITAA 1936.

Accordingly, the interest received by the taxpayer from Australian sources that is subject to withholding tax will not form part of their assessable income under subsection 6-5(3) of the ITAA 1997.

Date of decision: 22 January 2004

Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008 Year ended 30 June 2009

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5(3)
   section 6-15
   subsection 6-20(1)
   section 11-10

Income Tax Assessment Act 1936
subsection 128B(2)
section 128D

International Tax Agreements Act 1953
   section 4
   Schedule 10
   Schedule 10, Article 11(1)
   Schedule 10, Article 11(2)
   Schedule 10A

Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974
section 7

Keywords
Interest income
International tax
Netherlands
Non resident interest withholding tax

Siebel/TDMS Reference Number: 3903929

Business Line: Public Groups and International

Date of publication: 6 February 2004

ISSN: 1445-2782

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