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Ruling
Subject: Foreign rental property expenses
Question and answer:
Can I claim the excess interest expense on my foreign rental property against Australian income?
Yes
This ruling applies for the following period:
Year ended 30 June 2012.
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You are a resident of Australia for tax purposes.
You purchased a property in Place A.
The property title lists you and your spouse as joint owners.
You have rented the property out for holiday home purposes.
You have incurred interest expenses.
You have made a net loss.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
International Tax Agreements Act 1953 Section 4.
International Tax Agreements Act 1953 Subsection Sch1-Art6(1).
Reasons for decision
As an Australian resident, your assessable income includes income from all sources, both in and out of Australia, You are able to deduct any loss or outgoing that you incur in gaining or producing this income (section 8-1 of the ITAA 1997). However, you are unable to deduct expenses where they are considered to be of a capital, private or domestic nature, or relate to the earning of 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 double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).
Schedule 11 to the Agreements Act contains the tax treaty between Australia and Country A (The Country A Convention) and operates to avoid double taxation of income received by Australian and Country A residents.
Article 6(1) of the Country A Convention provides that income derived by a resident of Australia from real property situated in Country A may be taxed by Country A and also by Australia. However, a foreign tax credit will be allowed in Australia for any income tax paid in Country A by an Australian resident in relation to such rental income.
As you have incurred a foreign sourced net loss on the rental of your Country A property you are entitled to offset this loss against Australian sourced income.