Edited version of your private ruling

Authorisation Number: 1012491554128

Ruling

Subject: Foreign income and foreign rental loss

Questions and answers:

1. Is the income your earn from contract employment in Country A included in your assessable income in Australia?

Yes

2. If the income you earn from contract employment in Country A is included in your assessable income in Australia, are you entitled to a foreign tax credit in respect of tax paid on that income in Country A?

Yes.

3. Are you entitled to include losses from a foreign rental property in your Australian income tax return?

Yes.

This ruling applies for the following period:

1 July 2013 to 30 June 2017.

The scheme commenced on:

1 July 2013.

Relevant facts and circumstances:

You are a resident of Australia for taxation purposes.

You earn income from contract employment in Country A.

You pay tax in Country A on the income you earn from your contract employment there.

You will make a rental loss on a foreign rental property.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Agreements Act 1953 Section 4

Income Tax Agreements Act 1953 Section 5

Reasons for decision

Assessability of income from employment in Country A by an Australian resident taxpayer

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes all the ordinary income they derive from all worldwide sources in an income year.

Salary and wages and other similar remuneration derived from employment is an example of ordinary income.

In determining liability to Australian tax on income from overseas employment, it is necessary to consider not only the general income tax laws, but also the operation of any applicable double tax agreement.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision of an Agreement that is listed in section 5 of the Agreements Act has the force of law.

Australia has a double tax agreement with Country A (the Agreement) that is listed in section 5 of the Agreements Act as being a current Agreement that has the force of law.

Article 14 of the Agreement specifies that salaries, wages and other similar remuneration derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in Country A and that when such employment is exercised in Country A, then the income earned from that employment may also be taxed in Country A.

Article 23(1) of the Agreement provides that tax paid under the law of Country A and in accordance with the Agreement, in respect of income derived by a taxpayer who is a resident of Australia from sources in Country A, shall be allowed as a credit against Australian tax payable in respect of that income.

Application to your circumstances

You are an Australian resident for taxation purposes and you earn income from contract employment in Country A. Despite the fact that you pay tax on this income in Country A, the income is also included in your assessable income in Australia.

Because the income you derive from your employment in Country A is assessable in Australia, you will be entitled to a foreign tax credit to the equivalent of the income tax you pay on that income in Country A.

Foreign rental property losses

Income from a rental property is also a form of ordinary income and is included in the assessable income of an Australian resident taxpayer under the provisions of section 6-5 of the ITAA 1997.

When a taxpayer earns rental income from a property, they are entitled to a variety of deductions for losses and outgoings associated with the earning of that income. These deductions are provided for by various sections of the tax law.

When deductions for allowable losses and outgoings in respect of a rental property exceed the income earned from that property, a net rental loss is made.

When the property concerned is a foreign rental property, the net income or loss from that property is declared against Item 20 (Foreign source income and foreign assets or property) in the supplementary section of the relevant income tax return (generally against Label R - Net Foreign Rent - although the labels may change from year to year) and is used to determine the total of the taxpayer's supplementary income for the year, which in turn is used to determine the taxpayer's total assessable income for the year.

Declaring a net loss from foreign rental property against item 20 in the supplementary income tax return has the effect of reducing a taxpayer's assessable income for the year in question.

Application to your circumstances

You will make a net loss from a foreign rental property. You are entitled to include your share of that loss in your Australian income tax return under Item 20 of the supplementary section of your income tax return.

Conclusion

The income from your contract employment in Country A is assessable in Australia however you are entitled to a foreign income tax offset for tax paid on that income in Australia.

You are entitled to include any net rental loss from your foreign rental property in your Australian income tax return.