Edited version of your written advice

Authorisation Number: 1012877344577

Date of advice: 18 September 2015

Ruling

Subject: Foreign interest derived by an Australian resident

Question 1

Is a resident of Australia required to declare interest income that is derived and held in another country for a period of 3 years?

Answer

Yes

Question 2

Is the principal sum held on deposit in another country subject to Australian income tax or capital gains tax?

Answer

No

Question 3

Is any income derived from another country that is assessable in Australia reduced by the amount of tax paid on that income to another country?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You are a resident of Australia and received a distribution from your parents's estate. The distribution was paid into Capital Gains Bonds for a period of 3 years in order to avoid paying capital gains tax in the country of issue.

These bonds paid interest on the capital sum which, as you are a non-resident of that country, was taxed at the applicable rate which you state is 30% of the interest derived.

You have provided various documents including statements from your foreign bank, which show the inheritance being credited to the account; the transfer of this amount to a foreign government authority, the return of the principal sum after 3 years, various credits which you have indicated are interest due to you after deduction of foreign government taxes and a withdrawal of interest made by you from the account in the 2014-15 income year.

Under the terms of the bond issue, all interest earned on the bonds was available for your use but the principal sum could not be removed until the expiration of the 3 year period.

Relevant legislative provisions

Income Tax Assessment Act 1936 - Section 160AF(1)

Income Tax Assessment Act 1997 - Section 6-5

Income Tax Assessment Act 1997 - Section 8-1

International Tax Agreements Act - Schedule 35

Reasons for decision

Question 1

Summary

A resident of Australia is assessable on their ordinary income from all sources, including other countries, unless the income is exempt under Australian income tax law.

Detailed reasons for decision

Section 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a taxpayer who is a resident of Australia is assessable on the ordinary income derived directly or indirectly from all sources, whether in or out of Australia during the income year unless the income is made exempt by a provision of the ITAA 1997.

Ordinary income is not defined in income tax law but, based on decisions made by the relevant courts and tribunals, it can be said that it includes receipts that:

• are earned;

• are expected;

• are relied upon; and

• have an element of periodicity, recurrence or regularity.

Interest received by or accrued to a resident is therefore income according to ordinary concepts and forms part of a resident taxpayer's assessable income, regardless of the source or the form of payment. As such, interest derived by a resident from sources outside Australia is subject to Australian tax.

Interest is usually taxed as and when received, except in the case of a money lending business which uses the accruals basis of accounting.  Interest, may however, be constructively received without actual receipt if it is made available to the lender's use or is capitalised or otherwise dealt with on behalf of or at the discretion of the lender.  Constructive receipt is when income is credited without restriction and made available to the taxpayer. Interest credited on fixed-term deposits and added to capital is an example of a constructive receipt.

As you are a resident of Australia for income tax purposes, your assessable income includes your world-wide income that is not exempt income under Australian law. Interest derived from a deposit account in another country is not exempt from Australian income tax and is thus correctly included in your assessable income for the purpose of assessing your tax liability in Australia.

Question 2

Summary

The principal sum held on deposit in India is not subject to income tax or capital gains tax in Australia. Only the interest or any other income derived from the deposit is included in your Australian assessable income

Detailed reasons for decision

Australian tax law does not have any provision that would create an income tax or capital gains tax liability in respect of the principal sum held in an investment account in another country.

Australian tax law, in general, assesses income or profits derived from an activity but not the principal sum invested. Interest income derived as a result of the investment of the principal sum is included in assessable income but there is no further income tax due on the principal sum.

Capital gains tax may apply where an asset is disposed of at a profit but it cannot apply to the principal sum invested in an interest bearing account as there has been no change in the amount originally invested.

Where the only addition to the principal sum invested is the interest accrued each year and the interest so derived is subject to income tax there is no capital gains tax due on the increased principal sum. This is because the increase in the principal sum is wholly attributable to the interest derived.

Question 3

Summary

You cannot reduce the amount of interest assessable in Australia by the amount of any tax paid in another country but a credit will be allowed in Australia against tax assessed for tax paid in that country in accordance with .

Detailed reasons for decision

The assessable income of a taxpayer may be reduced by deductions which are allowable under either the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997 in order to calculate the taxable income on which income tax is payable.

There is no specific provision under either Act that allows a deduction for income tax paid to a foreign country, or Australia for that matter, so any deduction sought would fall for consideration under the general deduction provisions at section 8-1 of the ITAA 1997.

Under section 8-1 of the ITAA 1997, for a person not engaged in business, a deduction is allowable for expenditure incurred in gaining or producing their assessable income, so long as the expenditure is not of a capital, private or domestic nature and is not incurred in deriving exempt income or the deduction is prevented by another provision of the Act.

In your case, at the time the tax liability is incurred in the other country, the income had already been derived. Therefore it cannot be said that the income tax cost is incurred in deriving your assessable income. Further income tax, whether paid to another country or Australia, is considered to be a private expense and is therefore precluded from deduction under section 8-1 of the ITAA 1997.

The gross interest derived must therefore be included in your Australian income tax returns and no deduction will be allowed for income or other taxes paid in another country.

However, subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of an Australian resident taxpayer contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of:

• the amount of the foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or

• the amount of Australian tax payable in respect of the foreign income.

As the conditions contained in subsection 160AF(1) of the ITAA 1936 are satisfied, you are entitled to a foreign tax credit for the tax paid in India. The amount of the credit will be the lesser of the foreign tax paid or the Australian tax payable in respect of the foreign income.

Note: Where the foreign tax paid is greater than the Australian tax payable, the taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess tax paid.