ATO Interpretative Decision

ATO ID 2007/76

Income Tax

Assessability of interest income sourced from Sri Lanka received by an Australian resident
FOI status: may be released

This ATO ID has been amended to replace the repealed subsection 160AF(1) of the Income Tax Assessment Act 1936 by subsection 770-10(1) of the Income Tax Assessment Act 1997. The term 'foreign tax credit' is also replaced by 'foreign income tax offset'. With effect from 1 July 2008 the foreign tax credit system contained in Div 18 of the Income Tax Assessment Act 1936 has been replaced by the foreign income tax offset system contained in Div 770 of the Income Tax Assessment Act 1997. The 'Note' at the end of the ATOID has also been amended accordingly.
This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 interest income received by an Australian resident taxpayer from bank accounts located in Sri Lanka assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The interest income received by an Australian resident taxpayer from sources in Sri Lanka is assessable income under subsection 6-5(2) of the ITAA 1997.

Facts

The taxpayer is an Australian resident for income tax purposes.

The taxpayer receives interest income from bank accounts in Sri Lanka.

Reasons for Decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer 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 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 31 to the Agreements Act contains the double tax agreement between Australia and the Democratic Socialist Republic of Sri Lanka (the Sri Lankan Agreement). The Sri Lankan Agreement operates to avoid the double taxation of income received by Australian and Sri Lankan residents.

Article 11(1) of the Sri Lankan Agreement provides that interest from sources in Sri Lanka, to which a resident of Australia is beneficially entitled, may be taxed in Australia.

Article 11(2) of the Sri Lankan Agreement provides that the interest income may also be taxed in Sri Lanka. However, the rate of tax shall not exceed 10 percent of the gross amount of interest.

Article 23(1) of the Sri Lankan Agreement provides that a credit against Australian tax for tax paid in Sri Lanka shall be allowed (in accordance with the law of Australia) where tax has been paid under Sri Lankan law and in accordance with the Sri Lankan Agreement.

Subsection 770-10(1) of the ITAA 1997 provides that where the assessable income of a resident contains foreign income and foreign income tax has been paid on that income, a tax offset will be allowed subject to a limit. Subsection 770-75(2) provides that the offset limit is the greater of $1,000. and the total amount of Australian income tax that is payable by the taxpayer in the income year less the amount of tax that would be payable in the income year if certain assumptions were made.

As the taxpayer is a resident of Australia, the interest income forms part of their assessable income under subsection 6-5(2) of the ITAA 1997. Where Sri Lankan tax is paid in relation to this interest income, a foreign income tax offset may be allowed.

Note: There is a threshold of $1,000 which applies to the calculation of the offset limit. That is, a taxpayer who is claiming a foreign income tax offset of $1,000 or less in a particular income year is not required to calculate the offset limit. In this situation, the taxpayer can claim the entire amount of foreign income tax paid as a tax offset. Where a taxpayer has paid foreign income tax in respect of an amount that is non-assessable non-exempt income under s23AI or s23AK of ITAA 1936, the threshold of $1,000 will be increased by the amount of that foreign income tax. The offset is non-refundable, with the result that if it exceeds the amount of tax otherwise payable for the year, the excess is lost. The excess cannot be transferred to another taxpayer and the excess cannot be carried forward to a later income year.

Date of decision: 18 September 2006

Year of income: Year ended 30 June 2006 Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5(2)
   subsection 770-10(1)
   subsection 770-75(2)

International Tax Agreements Act 1953
   section 4
   Schedule 31
   Schedule 31, Article 11(1)
   Schedule 31, Article 11(2)
   Schedule 31, Article 23(1)

Keywords
Double tax agreements
Foreign income
Foreign tax credits
Interest income
International tax
Sri Lanka
Treaties

Siebel/TDMS Reference Number: 5341648

Business Line: International Centre of Expertise

Date of publication: 27 April 2007

ISSN: 1445-2782

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