ATO ID 2009/93: Income Tax: assessability of rental income received by Australian resident from the United Kingdom
Date of decision: 19 August 2009
Year of income: Year ended 30 June 2009
Business line: Public Groups and International

Issue
Is the rental income received by an Australian resident from real property located in the United Kingdom (UK) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The rental income received by an Australian resident from real property located in the UK is assessable under subsection 6-5(2) of the ITAA 1997. However, the taxpayer is entitled to a foreign income tax offset under Division 770 of the ITAA 1997.

Facts
The taxpayer is a resident of Australia. The taxpayer owns real property located in the UK and receives rental income from the property. The taxpayer has paid UK tax on the rental income.

Reasons for decision
Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Rental income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. 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 tax treaty, contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one. Schedule 1 to the Agreements Act contains the tax treaty between Australia and the United Kingdom of Great Britain and Northern Ireland and the Notes to the agreement (the 2003 UK Convention). The 2003 UK Convention operates to avoid double taxation of income received by Australian and UK residents. Article 6(1) of the 2003 UK Convention provides that income derived by a resident of Australia from real property may be taxed by the country in which the real property is situated. Paragraph 23 of Taxation Ruling TR 2001/13 states that the phrase 'may be taxed' normally means the source country has a non-exclusive entitlement to tax the income. However, the country of residence of the taxpayer may also tax the income subject to the laws of that country, unless the tax treaty explicitly prevents it. As the taxpayer is a resident of Australia who owns real property situated in the UK, the rental income derived by the taxpayer may be taxed in Australia and the UK. Consequently the rental income received by the Australian resident from real property located in the UK is assessable under subsection 6-5(2) of the ITAA 1997. Article 22(1)(a) of the 2003 UK Convention provides that, subject to the provisions of the laws of Australia, a credit against Australian tax payable shall be allowed for UK tax paid (in accordance with the law of Australia) where tax has been paid under UK law and in accordance with the 2003 UK Convention. As UK tax has been paid by the taxpayer in respect of the same income that is subject to tax by the taxpayer in Australia, Australia is required to provide taxation relief under the 2003 UK Convention. Division 770 of the ITAA 1997 allows a foreign income tax offset for foreign tax that a taxpayer has paid on income that is included in the taxpayer's assessable income. The general rule under section 770-10 of the ITAA 1997 is that, to qualify for an offset for an income year, the taxpayer must have paid foreign income tax on an amount that is included in its assessable income for that year, though there are exceptions in certain situations, such as where the tax has been deducted as source, or otherwise paid on the taxpayer's behalf (section 770-130 of the ITAA 1997). As UK tax has been imposed and paid on the rental income which is included in the taxpayer's assessable income in Australia, the taxpayer is entitled to a foreign income tax offset.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(2) Division 770 section 770-10 section 770-130
Related public rulings and determinations: Taxation Ruling TR 2001/13
Subject references: Double tax agreements International tax Rental property Rental property income United Kingdom