Edited version of private ruling

Authorisation Number: 1011473450771

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Ruling

Subject: Assessability of rental income from an overseas investment property

Question and answer:

Is the income from a rental property you own in another country included in your assessable income in Australia?

Yes.

This ruling applies for the following period:

1 July 2008 to 30 June 2009.

The scheme commenced on:

1 July 2008.

Relevant facts:

You are an Australian resident for taxation purposes.

You jointly own an investment property in another country.

You earn rental income from that property and pay tax on that rental income in the other country.

Relevant legislative provisions:

Income Tax Assessment Act 1997 subsection 6-5(2)

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 Schedule 15

International Tax Agreements Act 1953 Schedule 15, Article 6(1)

International Tax Agreements Act 1953 Schedule 15, Article 22(1)

Reasons for decision

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 an income year.

Rental income is ordinary income.

In determining liability to Australian tax on any foreign sourced income such as rent from an overseas investment property, it is necessary to consider not only the income tax laws, but also the operation of any double tax agreement (DTA) contained in the International Tax Agreements Act 1953 (Agreements Act) that is applicable.

The Agreements Act contains a DTA between Australia and the other country (the Agreement).

The Agreement operates to avoid the double taxation of income received by Australian residents and residents of the other country. The Agreement does not prevent income from sources in Australia or the other country from being taxed in both countries in some cases.

The Agreement provides that rental income derived by an Australian resident from real property situated in the other country may be taxed in that country.

Real estate, such as an investment property, is real property for the purposes of the Agreement.

Paragraph 23 of Taxation Ruling TR 2001/13 states that the phrase 'may be taxed' means the source country of the income has a non-exclusive entitlement to tax the income. Unless specifically prevented by any relevant DTA, this means that a taxpayer's country of residence may also tax the income where the tax law of the country of residence permits it to do so.

The Agreement does not exclude the rental income from your investment property in the other country from being taxable in Australia.

Conclusion

In your case, because you are an Australian resident, any rental income you derive from your investment property in the other country will be included in your assessable income in Australia under the provisions of subsection 6-5(2) of the ITAA 1997.

This is the case regardless of whether or not you pay tax on that income in the other country.

General advice - entitlement to foreign tax credits for tax paid in the other country

An Article of the relevant foreign country Agreement provides that tax paid under the law of the foreign country (and in accordance with the Agreement), in respect of income derived from sources in the relevant foreign country by a taxpayer who is a resident of Australia, shall be allowed as a credit against Australian tax payable in respect of that income.

This means that when rental income derived from a taxpayer's investment property in the foreign country is assessable in Australia, the taxpayer will be entitled to a foreign tax credit for the foreign country income tax paid on that income.

If the foreign country tax is less than the Australian tax payable, the taxpayer will be entitled to a full credit for the foreign tax paid.

Where the foreign tax is greater that the Australian tax payable, the taxpayer is entitled only to a credit equal to the value of the Australian tax payable and cannot recover any excess foreign tax paid.