Edited version of private ruling

Authorisation Number: 1011531548343

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Foreign income - Dividend

Question

Is the capital dividend received by an Australian resident, from a private company in country A taxable in Australia?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You are a citizen of country A.

You are an Australian resident for taxation purposes.

In the 2008-09 income year you received a capital dividend from a private company in country A.

Withholding tax was deducted from the capital dividend.

You have been advised by your tax agent in country A that a capital dividend is not taxable in country A if received by a country A resident for taxation purposes.

You state that the company is in-corporate of X or Y shareholder and is not listed in the share exchange market.

You also state that the company distribute the cash to the shareholder as non- capital dividend.

You also received taxable dividend from the company with withholding tax deducted. This dividend will be disclosed in your 2009 income tax return as foreign income.

As stated under subsection of the country A legislation, no part of a capital dividend is included in computing Part I income of a shareholder resident in country A. Capital dividends paid to non-residents of country A are subject to non-resident tax (withholding tax).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 6-10.

International Tax Agreements Act 1953 Section 4.

Income Tax Assessment Act 1936 Subsection 160AF(1).

International Tax Agreements Act 1953.

Reasons for decision

Assessability of country A dividends

According to subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes other income (statutory income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Dividend income is other income (statutory income) for the purpose of subsection 6-10(4) of the ITAA 1997.

Section 6 of the ITAA 1997 states dividend includes:

(a) any distribution made by a company to any of its shareholders, whether in money or other property; and

(b) any amount credited by a company to any of its shareholders as shareholders;

In your case, you are a shareholder of a company. You as a shareholder received a distribution. The withholding tax has been deducted. Therefore, this amount satisfies the definition of dividend under section 6 of the ITAA 1997. Hence, the dividend received from country A is assessable under subsection 6-10(4) 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).

The relevant schedule to the Agreements Act contains the tax treaty between Australia and country A (the country A Agreement). The country A Agreement operates to avoid the double taxation of income received by Australian and country A residents.

The relevant article of the country A Agreement provides that dividends paid by a company which is resident of country A, being dividends to which a resident of Australia is beneficially entitled, may be taxed in Australia.

Therefore, as a resident of Australia, any country A dividend income you derived forms part of your Australian source income and is assessable under subsection 6-10(4) of the ITAA 1997.

Accordingly, as a resident of Australia your country A dividend forms part of your Australian assessable income for the 2009 income year.

Entitlement to a foreign tax offset 

The relevant article of the country A Agreement provides that dividends may also be taxed in country A, but the rate of tax is limited to X per cent of the gross amount of dividends.

The relevant article of the country A Agreement provides that a credit against Australian tax will be allowed for any tax paid in the country A where tax has been paid under country A law.

According to subsection 160AF(1) of the ITAA 1936, a foreign tax credit can be allowed where:

- the assessable income of a resident taxpayer includes foreign sourced income, and

- the taxpayer has paid foreign tax in respect of this income.

The foreign tax credit allowed against Australian income tax is the lesser of:

- the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax; or

- the amount of Australian tax payable in respect of the foreign income.

As country A tax has been paid in relation to your country A dividend income, you are eligible for a foreign tax offset against your Australian income tax for the 2009 income year.