Edited version of private ruling

Authorisation Number: 1011690160409

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Ruling

Subject: Foreign income

Question

Are the prizes won from your investments in bonds in Country A assessable in Australia?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2009.

Year ending 30 June 2010.

The scheme commenced on

1 July 2008.

Relevant facts

You are a resident of Australia for income tax purposes.

You have invested in government bonds issued in Country A.

No interest is paid on the investment but the holder of the investment is entitled to participate in a monthly prize winning activity organised by the investment body.

The investment body randomly selects the bond numbers each month and draws the prizes.

Each bond has a separate and equal chance of winning a prize.

The prize money is not taxed in Country A.

Australia has a tax treaty with Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 26AJ.

Income Tax Assessment Act 1936 Section 26AJ(1).

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Subsection 6-10(4).

Income Tax Assessment Act 1997 Section 10-5.

International Tax Agreements Act 1953 Section 4.

Reasons for decision

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income includes statutory income amounts which are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident, includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists provisions about assessable income. Included in the list is section 26AJ of the ITAA 1936 which deals with investment-related lottery winnings, including cash prizes. The effect of subsection 26AJ(1) of the ITAA 1936 is that where an amount is paid to a taxpayer and:

· the payment is by way of winnings from betting, lottery or another form of gambling or game with prizes,

· the chance to participate in, for example the lottery, was provided wholly or partly in respect of an investment held by the taxpayer in or with an investment body, and

· the lottery or game was organised by the investment body,

then the amount received by the taxpayer is included in their assessable income.

The prize money for holding bonds in Country A meet the requirements of 26AJ(1) of the ITAA 1936. The prize is the result of the monthly draw which are organised by your investment body. The chance to participate in the event is provided wholly in respect of an investment you hold with the investment body. This amount is therefore statutory income and is included as assessable income under section 6-10 of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income received by a resident, 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 ITAA 1997 so that both Acts are read as one.

An article to the Agreements Act contains the tax treaty between Australia and Country A (the Country A Convention). The Country A Convention operates to avoid the double taxation of income received by Australian and Country A residents.

An article of the Country A Convention states that interest arising from Country A and beneficially owned by a resident of Australia may be taxed in Australia.

Another article of the Country A Convention defines the term 'interest' to mean debt-claims of every kind, and in particular, income from government securities and income from bonds and debentures, and income from any other form of indebtedness.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting tax treaties. Paragraph 104 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting tax treaties.

In relation to 'interest' paragraph 3 of the OECD Commentary on Article 11 provides:

The term 'interest' as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds and debentures, including premiums and prizes attaching to such securities, bonds or debentures.

It follows from the OECD Commentary that the winnings from the prize draw from the investment in bonds in Country A are interest as defined in the Country A Convention.

Consequently, as a resident of Australia, the prizes you derived from the bonds which have their source in Country A may be taxed in Australia under the Country A Convention.

Accordingly, any amount that you may have received as winnings from the prize draws organised by the investment body is included in your assessable income in Australia under subsection 6-10 of the ITAA 1997.