ATO Interpretative Decision

ATO ID 2009/126

Income Tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.

Issue

Is the French sourced interest income received by an Australian resident individual assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The French sourced interest income received by an Australian resident individual is assessable under subsection 6-5(2) of the ITAA 1997. However, if the Australian resident has paid French income tax on the interest income, they are entitled to claim a foreign income tax offset.

Facts

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer receives interest income from French sources.

The interest was paid at an arm's length rate, and was not connected with a permanent establishment of the taxpayer in France.

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 tax treaty contained in the International Tax Agreements Act 1953 (the 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 11 to the Agreements Act contains the tax treaty between Australia and France (the 2006 French Convention) which came into force on 1 June 2009. The 2006 French Convention operates to prevent fiscal evasion and to avoid double taxation of income received by Australian and French residents.

Article 11(1) of the 2006 French Convention provides that interest income arising in France, being interest which is beneficially owned by a resident of Australia, may be taxed in Australia. However, Article 11(2) of the 2006 French Convention allows France to also tax the interest income, but at a rate not exceeding 10 per cent of the gross amount of the interest

Where France exercises its right under Article 11(2) of the 2006 French Convention to tax the interest, Article 23(1) of the 2006 French Convention operates to require the French tax paid to be allowed as a credit against Australian tax payable in respect of that income.

Hence, although the Convention limits the rate of tax France can impose, it allows for this interest income to be taxed by both countries. As the Convention does not prevent Australia taxing the interest income received by the Australian resident individual, the interest income is assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Further, the Convention obliges Australia to provide relief from double taxation. This reflects the position applicable under Australia's domestic general foreign income tax offset rules in Division 770 of the ITAA 1997.

Subsection 770-10(1) of the ITAA 1997 provides for a foreign income tax offset for an income tax year for foreign income tax paid in respect of an amount that is included in assessable income.

Section 770-15 of the ITAA 1997 defines 'foreign income tax' to include a tax on income that is imposed by a law other than an Australian law. A note to section 770-15 of the ITAA 1997 points out that 'foreign income tax' includes only that which has been correctly imposed under the foreign law, and where the foreign jurisdiction has a tax treaty with Australia under the Agreements Act, foreign income tax includes only tax which has been correctly imposed under the treaty.

Consequently, an amount of tax that is imposed by France on the interest income and that is not more than 10% of the gross amount of the interest, will satisfy the definition of 'foreign income tax'. If the Australian resident individual has paid that foreign income tax, they will be entitled to a foreign income tax offset in relation to that tax. The amount of foreign income tax offset is calculated in accordance with Subdivision 770-B of the ITAA 1997.

Year of income:  Year ended 30 June 2009 Year ended 30 June 2010 Year ended 30 June 2011

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5(2)
   subsection 770-10(1)
   section 770-15
   subdivision 770-B

ATO Interpretative Decisions overturned by this decision
ATO ID 2004/347

Keywords
Double tax agreements
Foreign income
Foreign income tax offset
Foreign tax
France
Interest income
International tax

Siebel/TDMS Reference Number:  6300102

Business Line:  Public Groups and International

Date of publication:  6 November 2009

ISSN: 1445 - 2782