Edited version of private advice

Authorisation Number: 1051592167262

Date of advice: 18 October 2019

Ruling

Subject: Rental income

Question

Is the rental income derived by the trustees for the property assessable as per section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You and your spouse migrated to Australia and are classified as Australian residents for tax purposes.

They acquired a property in 2007 and have used this property as their principal residence since the time of acquisition.

Prior to moving to Australia, the following pension funds were set up by the family:

·         The trustees of Self Invested Pension Fund 1; and

·         The trustees of Self Invested Pension Fund 2

In 2015, the property was converted to strata title.

The second lot which emerged from the restructure was rezoned as a commercial property which was sold to the two pension funds (via two sub trusts).

The use of the two sub trusts was a requirement imposed by the pension fund organisation in cases where personal superannuation funds are concerned.

The reason that the commercial lot was sold to the pension funds was due to the fact that they had been in existence for many years, and also the fact that there was some doubt that the applications for Australian residency being made by the family might not proceed due to the failure to satisfy all conditions being imposed on them at the time by local authorities.

As a result, one half of the property was sold in 2015 for $XX,XXX to

·         The trustees of Self Invested Pension Fund 1as to 50%; and

·         The trustees of Self Invested Pension Fund 2 as to 50%

Both of these entities have an Australian ABN and TFN and are registered for GST as the rental received is of a commercial nature. Rental income has been collected since the time of the transfer of the property to the pension funds.

After the commercial property was acquired by the pension funds it was immediately leased back to a business which is owned and operated by you and your spouse and this has been undertaken at normal market rates.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Assessability of Australian Rental Income

Rental income from real property is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997 and is assessable in Australia.

This is consistent with Australia's Double Tax Agreements with other countries under which income from real property may be taxed in the country in which the property is situated.

Article 6 of the relevant Convention considers income from real property. Article 6(1) of the convention provides that income from real property may be taxed by the country in which such real property is situated. Real property includes property available for lease or rental such as in your case.

Paragraph 23 of Taxation Ruling 2001/13 provides guidance on the interpretation of the phrase 'may be taxed' in an article of a double tax agreement (DTA):

What the phrase 'may be taxed' normally means is that the country mentioned (the source country) has a non-exclusive entitlement to tax the income. Under normal international tax principles, the other (residence) country may also continue to tax its residents (where its domestic law so provides) on the income, wherever sourced, unless the DTA explicitly prevents it from doing so.

Therefore, as per Article 6 (1) of the convention, the income from real property received by the trusts is assessable in Australia.