Edited version of private ruling

Authorisation Number: 1011750388841

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Ruling

Subject: Foreign tax

Question 1

Is the Superannuation Fund (the Super Fund) assessable on rental income derived from rental property in Country A?

Answer

Yes.

Question 2

Is a foreign income tax offset available for foreign tax paid by the Super Fund on rental income derived from rental property in Country A?

Answer

Yes.

Question 3

Are there options to choose which foreign exchange rates apply to convert the rental income and foreign tax paid into Australian currency?

Answer

Yes.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commences on:

1 November 2010

Relevant facts and circumstances

The Super Fund is a self-managed super fund.

The Super Fund is a resident of Australia for income tax purposes.

The Super Fund invests directly in properties situated in Country A from which it derives rental income.

The Super Fund pays Country A tax on rental income derived from its properties situated in Country A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 770-10,

Income Tax Assessment Act 1997 Section 770-70,

Income Tax Assessment Act 1997 Section 770-75,

Income Tax Assessment Act 1997 Section 770-130,

Income Tax Assessment Act 1997 Section 960-50 and

International Tax Agreements Act 1953 Section 4.

Reasons for decision

Assessability of rental income derived from properties situated in Country A

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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 X to the Agreements Act contains the tax treaty between Australia and Country A (Country A Convention). The Country A operates to avoid double taxation of income received by Australian and Country A residents.

Article A of the Country A 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.

The Super Fund is a resident of Australia for income tax purposes and invests directly in properties situated in Country A. Thus, any rental income derived by the Super Fund in relation to these properties may be taxed in Australia and Country A.

Consequently the rental income received by the Super Fund from real property situated in Country A is assessable under subsection 6-5(2) of the ITAA 1997.

Availability of the foreign income tax offset for foreign tax paid on rental income derived from Country A

Article B of the Country A Convention provides that, subject to the provisions of the laws of Australia, a credit against Australian tax payable shall be allowed for Country A tax paid (in accordance with the law of Australia) where tax has been paid under Country A law and in accordance with the Country A Convention.

The Super Fund pays Country A tax on rental income derived from its properties situated in Country A.

Thus, when Country A tax is paid by the Super Fund in respect of the rental income which is assessable in Australia, Australia is required to provide taxation relief under the Country A 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 in Australia.

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).

Thus, the Super Fund is entitled to a foreign income tax offset for the Country A tax which has been imposed and paid on the rental income which is included in the Super Fund's assessable income in Australia.

Amount of foreign income tax offset available for foreign tax paid

Pursuant to section 770-70 of the ITAA 1997, to claim a foreign income tax offset of up to $1,000, a taxpayer only needs to record the actual amount of foreign income tax paid on assessable income (up to $1,000).

However, if the taxpayer is claiming a foreign income tax offset of more than $1,000, the taxpayer has to work out your foreign income tax offset limit under section 770-75 of the ITAA 1997. This may result in the tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to the taxpayer.

Choice of exchange rates for converting Country A rental income into Australian currency

Subdivision 960-C of the ITAA 1997 sets out the basic rules for converting foreign currency into Australian currency. The table in subsection 960-50(6) of the ITAA 1997 outlines the exchange rate at which amounts in respect of particular transactions are to be translated.

Item 6 of the table in subsection 960-50(6) of the ITAA 1997 specifies that an amount of ordinary income is to be translated the exchange rate applicable at the time of receipt if the amount is received at or before the time when it is derived. In any other case, the ordinary income amount is to be translated to Australian currency at the exchange rate applicable when it is derived.

The Super Fund pays Country A on rental income derived from its properties situated in Country A.

Paragraph 48 of Taxation Ruling TR 98/1 states that rent is generally assessable when it is received or applied at the taxpayer's direction.

Applying TR 98/1, it follows that the Super Fund's rental income from Country A is derived when it is received.

Therefore, as rental income is ordinary income, Item 6 of the table in subsection 960-50(6) applies and the Super Fund's rental income from Country A is to be translated to Australian currency at the exchange rate applicable at the time of receipt.

However, Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (Regulations) states in Item 12 that as a alternative to the result mentioned in Item 6 of the table in subsection 960-50(6) of the ITAA 1997, a foreign currency amount may be translated into Australian currency using any of the rules set out in Schedule 2 to the Regulations.

The rules set out in Schedule 2 to the Regulations states that foreign currency amounts can be translated using average rates, daily rates or rates consistent with the rates used in the preparation of the an audited financial report.

For average rates, 1.3 of Schedule 2 to the Regulations states that generally, a taxpayer can translate an amount into Australian currency using an exchange rate that is an average of the exchange rates applicable during a period (which may be less than, but not exceeding, 12 months) chosen by the taxpayer. However, an average rate cannot be used unless the average rate is a reasonable approximation of the exchange rates that would otherwise be applicable if the taxpayer had used spot rates at the specific translation times provided for by subsection 960-50(6) of the ITAA 1997.

Choice of exchange rates for converting foreign tax paid into Australian currency

Foreign income tax paid in a foreign currency needs to be translated into Australian currency to determine the amount of the foreign income tax offset.

Subdivision 960-C of the ITAA 1997 sets out the basic rules for converting foreign currency into Australian currency. The table in subsection 960-50(6) of the ITAA 1997 outlines the exchange rate at which amounts in respect of particular transactions are to be translated.

There is no specific item which refers to foreign income tax offsets. However, residual Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to an amount of a receipt or a payment where none of the other items apply. The amount is to be translated to Australian currency at the exchange rate applicable at the time of the receipt or payment.

The Super Fund pays Country A tax on rental income derived from its properties situated in Country A. Therefore, Item 11 of the table in subsection 960-50(6) applies and Country A tax paid by the Super Fund on rental income derived from Country A is to be translated to Australian currency at the exchange rate applicable at the time of payment.

However, Regulation 960-50.01 of the Regulations states in Item 11A that where none of the other items (Items 1-10) apply in the table in subsection 960-50(6) of the ITAA 1997, the amount is to be translated into Australian currency at an exchange rate that is reasonable having regard to the circumstances.

Further, Item 12 in Regulation 960-50.01 of the Regulations states that as a alternative to the results mentioned in Item 11 of the table in subsection 960-50(6) of the ITAA 1997 and Item 11A in Regulation 960-50.01 of the Regulations, a foreign currency amount may be translated into Australian currency using any of the rules set out in Schedule 2 to the Regulations.

The rules set out in Schedule 2 to the Regulations states that foreign currency amounts can be translated using average rates, daily rates or rates consistent with the rates used in the preparation of the an audited financial report.

For average rates, 1.3 of Schedule 2 to the Regulations states that generally, a taxpayer can translate an amount into Australian currency using an exchange rate that is an average of the exchange rates applicable during a period (which may be less than, but not exceeding, 12 months) chosen by the taxpayer. However, an average rate cannot be used unless the average rate is a reasonable approximation of the exchange rates that would otherwise be applicable if the taxpayer had used spot rates at the specific translation times provided for by subsection 960-50(6) of the ITAA 1997.

Note

Paragraph 1.87 of the Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No 4) Act 2007 provides guidance on the interpretation of Division 770 of the ITAA 1997. For the purposes of the foreign income tax offset, 'the foreign income tax can be imposed under a law of national or supra-national government, a state or province, or at the local or municipal level of government'.

For more information in relation to the foreign exchange regulations, please refer to Foreign exchange (forex): general information on average rates at www.ato.gov.au.

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