Edited version of private ruling

Authorisation Number: 1011763096116

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Ruling

Subject: Foreign rental income

Question 1

Is rental income derived from commercial property in another country assessable in Australia?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2009

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

01 July 2007

Relevant facts

You are an Australian resident for taxation purposes.

Your relative owned X0% of a commercial property in another country.

The property was nationalised by a previous socialist government many years ago.

After the demise of the socialist government, the government of the other country enacted legislation that enabled return of nationalised property to its original owner. Your relative requested return of their property.

A partial court ruling was made a few years ago giving part ownership to you, part ownership to an associate of you with the remainder owned by the government of the other country. The court ruling also determined compensation and terms applying to the tenant.

The property consists of a number of titles.

One title has been rented to a company for a number of years before you owned the property. The rent you are legally entitled to has been paid to your associate. You have not received your share of the rental income.

About a year after the court ruling you ascertained that the company is paying rent to your associate and that they are paying some fees and duties to government agencies. You have an agreement with your associate that they could keep the rental income as they have been paying all legal expenses associated with court processes over the previous years.

The court process is still to be finalised as one title has not been processed.

You do not know the exact date that your associate started to receive rental income but you have an expectation of that time.

You have not declared any rental income and not claimed any rental expenses in your Australian income tax return.

Your intention is to sell your share of the property and to invest the proceeds in Australia.

Australia does not have a tax treaty with the other country.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 6-20

Income Tax Assessment Act 1997 Section 6-23

Income Tax Assessment Act 1997 Section 11-5

Income Tax Assessment Act 1997 Section 11-10

Income Tax Assessment Act 1997 Section 11-15

Income Tax Assessment Act 1997 Section 11-55

Reasons for decision

Question 1

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. Ordinary income is included in a taxpayer's assessable income unless it is exempt, or is made non-assessable.

Section 6-20 of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law. Sections 11-5, 11-10 and 11-15 of the ITAA 1997 provide lists of entities that are exempt from tax and types of income which is exempt from tax.

In your case, an individual is not listed as an entity that is exempt from tax and overseas rental income is not listed as a type of income which is exempt from tax.

Section 6-23 of the ITAA 1997 provides that an amount of ordinary income is non-assessable non-exempt income if a provision of this Act or another Commonwealth law states that it is not assessable income and is not exempt income. Section 11-55 of the ITAA 1997 provides a list of non-assessable non-exempt income provisions.

In your case, there is no provision of this Act or another Commonwealth law that states overseas rental income is not assessable income and is not exempt income.

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 (the Agreements Act).

Australia does not have a tax treaty with the other country. Therefore the assessability of your rental income from the other country will be determined under the taxation laws of Australia.

In your case, a court order of the other country issued on a particular date gave you a part interest in the property previously part owned by your relative, notwithstanding that you did not choose to become a legal owner of the property or have part of the property rented. Your associate, who also has the same part interest in the property has received rent from the tenant starting after the court order was issued and is paying fees and duties to government agencies. You made an agreement with your associate that they could keep the total amount of the income as they have been paying all legal expenses associated with court processes over a number of years. It is considered that this agreement is a private arrangement between non arms length parties, being yourself and your associate. It does not alter your legal entitlement or the assessability of your share of the rental income. As rental income has been paid by the tenant, you are entitled to receive your share according to your legal ownership.

It is considered that the rental income to which you are entitled to receive is ordinary income which is not exempt from income tax and has not been made non-assessable non-exempt by a provision of this Act or another Commonwealth law.

You are legally entitled to receive rental income as a result of a court order. There is no provision of the income tax legislation that will enable the Commissioner to grant this rental income to be considered as zero income with no deductions.

Consequently, this income forms part of your assessable income in terms of section 6-5(2) of the ITAA 1997.