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Ruling

Subject: Assessability of foreign interest income

Questions and answers:

Is the interest income earned by Australian resident taxpayers from sources in country Z included in assessable income?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on:

1 July 2005

Relevant facts and circumstances

You migrated from country Z to Australia several years ago and are residents of Australia for Australian taxation purposes.

You have included your worldwide income in your Australian income tax returns since becoming residents.

You have 2 bank accounts in country Z.

The accounts are known as individual savings accounts.

You were advised to take them out in country Z to in effect make up for the likely shortfall in returns you would receive from various endowments policies used to pay off your country Z home loan.

Effectively, they are indirectly linked to your house purchase in country Z.

The house is rented and income has been returned in your Australian income tax returns.

These accounts pay a 'tax free' interest each year which is added to the initial lump sum you deposited.

You have never taken any funds out and have no plans to do so, using the final proceeds to pay of your outstanding home loan in country Z.

They have the character of Endowment Policies other than the fact there is no life assurance attaching.

You have not made any additional contributions since you left country Z.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Ordinary income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) advises that an Australian resident taxpayer's income includes ordinary income derived during the income year from all sources, whether from within or outside of Australia.

Interest income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

When is income earned?

Subsection 6-5(4) of the ITAA 1997 explains that you derive an amount of ordinary income when the amount is received, or when it is dealt with in any way your behalf or as you direct.

Individual Saving Accounts (ISAs)

If you have ISAs that are bank accounts held in your names, then any interest income earned by the accounts is ordinary income assessable to you as residents of Australia under subsection
6-5(2) of the ITAA 1997.

The interest credited to your accounts remains assessable to you regardless of whether or not it is reinvested or transferred to an Australian bank account and accessed by you.

Double tax agreement

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the Australian income tax laws, but also any applicable double tax agreement contained in the International tax Agreements Act 1953 (the Agreements Act).

There is an agreement between Australia and country Z which advises that interest arising in country Z and beneficially owned by a resident of Australia may be taxed in Australia.

The Agreement goes further to explain that the interest may also be taxed in country Z but the rate of tax is limited to 10% of the gross amount of the interest.

If tax is also payable in country Z you are entitled to a foreign tax credit in respect of the tax paid on the interest income. The foreign tax credit allowed is the lesser of the foreign tax paid on the foreign income or the Australian tax payable in respect of that income.

Conclusion

As you are residents of Australia, the interest income earned from your ISAs in form part of your assessable income under subsection 6-5(2) of the ITAA 1997.

Page s20 of the TaxPack 2011 Supplement explains that you complete section 20 of the supplementary tax return to declare your country Z ISA interest income and to claim a foreign income tax offset (formerly known as foreign tax credit) for foreign tax you have paid.