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Edited version of your written advice

Authorisation Number: 1012771515821

Ruling

Subject: Foreign source income

Questions and answers

This ruling applies for the following periods:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You are the Trustee for an Australian resident self-managed superannuation fund (SMSF).

You intend to purchase a property in country X using a limited liability company (LLC).

LLC's are hybrid business entities having certain characteristics of both a corporation and a partnership or sole proprietorship, depending on how many owners there are.

An LLC is a type of unincorporated association and is not a corporation.

The primary characteristic an LLC shares with a corporation is limited liability.

The primary characteristic an LLC shares with a partnership is the availability of 'pass-through' income taxation.

The net income of the LLC will be passed through to you and you will be taxed in country X on that income.

Neither you nor the LLC will be borrowing to purchase the property.

The LLC will rent the property to tenants who will be unrelated to you.

The property will be managed by a property manager.

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 770-15

International Tax Agreements Act 1953

Reasons for decision

Foreign source income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. 

In determining your liability to pay tax in Australia it may be necessary to consider not only the domestic income tax laws but also any applicable double tax agreement as specified in the International Tax Agreements Act 1953.

There is a double tax agreement in force between Australia and country X (the country X agreement) which operates to avoid the double taxation of income received by residents of Australia and country X.

In your case, you will derive income from an LLC in country X and you will be taxed in country X on that income.

This type of income is not addressed by a specific article of the country X agreement so Article XX of the agreement will apply so that income not expressly mentioned in the agreement will be taxed in the country of residence and also by the country in which the income has its source.

Therefore, the country X agreement confirms that both Australia and country X have the right to tax the income you derive from the LLC.

Foreign income tax offset

Section 770-10 of the ITAA 1997 provides that you are entitled to claim a foreign income tax offset for foreign income tax paid in respect of an amount that is included in your assessable income.

Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains (section 770-15 of the ITAA 1997). You must have actually paid the foreign income tax to be eligible for the offset.

In your case, you will derive income from an LLC in country X and you will be taxed in both country X and Australia on this income.

Article XY of the country X agreement provides that country X tax paid under the law of country X and in accordance with the agreement in respect of income derived from sources in country X by a person who is a resident of Australia will be allowed as a credit against Australian tax payable in respect of the income. The credit cannot exceed the amount of Australian tax payable on the income.

Therefore, the country X agreement confirms that you are entitled to claim a foreign income tax offset for the income tax you pay in country X.

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