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Edited version of your written advice
Authorisation Number: 1012822445854
Date of advice: 23 June 2015
Ruling
Subject: Foreign rental income
1. Are you assessable in Australia on the net rental income of a limited liability company established in Country X?
Yes
2. Do you calculate the net rental income to include in your Australian tax return according to Australian income tax law?
Yes
3. Are you eligible to claim a foreign income tax offset for the foreign income tax paid?
Yes
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You are an Australian resident for tax purposes.
You purchased a property in Country X for rental purposes.
The property is owned by a limited liability company (the LLC).
The reason for using a LLC is that property ownership by non- Country X residents requires an interposed entity to be established.
LLC’s are hybrid business entities having certain characteristics of both a corporation and a partnership or sole proprietorship, depending on how many owners there are.
An LLC is a type of unincorporated association and is not a corporation.
The primary characteristic an LLC shares with a corporation is limited liability.
You are the only member of the LLC.
The net income of the LLC passes through to you and you are taxed in Country X on that income. The LCC is treated like a sole trader in Country X.
Under Country X income tax law, the LLC is a disregarded entity. You are therefore required to include the rental income and expenses incurred by the LLC in your own individual tax return in Country X.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 770-10
Income Tax Assessment Act 1997 Section 770-15
International Tax Agreements Act 1953
Reasons for decision
Foreign source income
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia.
In determining your liability to pay tax in Australia it may be necessary to consider not only the domestic income tax laws but also any applicable double tax agreement as specified in the International Tax Agreements Act 1953.
There is a double tax agreement in force between Australia and Country X (the Country X agreement) which operates to avoid the double taxation of income received by residents of Australia and Country X.
In your case, you derive rental income from a LLC in Country X and you are taxed in Country X on that income.
This type of income is not addressed by a specific article of the Country X agreement so Article XX of the agreement will apply so that income not expressly mentioned in the agreement will be taxed in the country of residence and also by the country in which the income has its source.
Therefore, the Country X agreement confirms that both Australia and Country X have the right to tax the income you derive from the LLC.
Thus you need to include in your Australian tax return the net rental income you derive from the LLC.
How do you calculate the net rental income for your tax return in Australia?
When you calculate your net rental income for Australian income tax purposes, you need to include income and claim rental deductions according to Australian income tax law. Thus your calculation of net rental income for your Country X tax return may be different to the calculation for your Australian tax return.
We refer you to our Rental property guide 2014-15 which is available on our website www.ato.gov.au.
Foreign income tax offset
Section 770-10 of the ITAA 1997 provides that you are entitled to claim a foreign income tax offset for foreign income tax paid in respect of an amount that is included in your assessable income.
Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains (section 770-15 of the ITAA 1997). You must have actually paid the foreign income tax to be eligible for the offset.
In your case, you derive income from a Country X LLC and you are taxed in both Country X and Australia on this income.
Article XY of the Country X agreement provides that tax paid under the law of Country X and in accordance with the agreement in respect of income derived from sources in Country X by a person who is a resident of Australia will be allowed as a credit against Australian tax payable in respect of the income. The credit cannot exceed the amount of Australian tax payable on the income.
Therefore, the Country X agreement confirms that you are entitled to claim a foreign income tax offset for the income tax you pay in Country X.